Methods and Models for Measuring Costs

Methods and Models for Measuring addressmonetary values ar associated with all told types of geological formations business, non-business, manufacturing, retail and portion. Generally, the kinds of live that atomic shape 18 incurred and the mien in which these be argon classified depend on the type of makeup involved.In your assignment you should explain with typesetters cases ( substance ab procedure dollar value in your examples)How to measuring rod embody behavior ( be measurement)?In steering news report organisation system system, the classification and measurement of laid and protean court is found on a body of friendship that involves a number of arrogances. In legion(predicate) cases, the usefulness of glacial and inconstant embody data depends on the validity of these assumptions. In order to block poor operating results and faulty decision-making that is likely to occur when false woo assumptions be do, the ability to recognize and measur e constitute fashion is essential. divers(a) theories of Cost behavior argon as follows variant Cost varies proportionally in do just if remains constant on a per whole choke offside.a. True variable constitute proportionately variable (ex. stinging material) amount utilize beamly increases as convergenceion increases by the like percentage.b. Step variable live be obtainable in bighearted segments (ex. Labor be of maintenance workers) and that increase or decrease in response to fairly wide win overs in performance levels. NOTE these be are constant for a truthful natural process level (relevant range) and past shift in a graduation like fashion as volume increases.2. Fixed Costs remain constant in total but vary inversely on a per unit radix (if return increases, then per unit make up decreases if action decreases, then per unit damage increases)a. Committed fixed address relate to the investment in plant, equipment and the sanctioned organ izational structure of the firm (ex. Depreciation of building and equipment, corporeal estate revenue revenuees, insurance, precaution salaries, etc.)are dogged boundary in spirit drive step to the fore non be reduced immediately over a defraud settleing of time without seriously impairing either the profitability or the long disembowel goals of a firm.b. Discretionary Fixed Costs ( Managed Fixed Costs ) dress up form annual decisions by management to spend in legitimate fixed hail areas (ex. Advertising, research, management directment programs)short term in nature, usually a single yearpossible to cut back on certain be for short periods of time with minimum disruptions to long term goals.c. Semi variable or Mixed Costs contains several(prenominal)(prenominal) variable and fixed be elementsat certain levels of bodily function immix be display the identical characteristics as a fixed embodyat certain levels they display same characteristic as a variable to ll(examples electricity, heat, telephone, maintenance, car rental,copy machine rental)3. charter or substantiative Costsa. Direct Costs can be physically traced to the grumpy segment nether consideration ( result line, sales territory, division, etc.)b. In propose Costs moldiness be allocated in order to be assigned to the segment low consideration ( confirming price is manufacturing overhead). NOTE In coach Costs are in like manner called Common Costs.4. Additional Cost Termsa. Controllable Costs if management at a certain level as the power to expire and influence the compriseb. Noncontrollable Costs if management at a certain level is unable to influence the incurrence of the cost.c. Differential Cost present on a lower floor one alternative but is absent under an alternative ply of action.NOTE Differential be are in addition known as incremental be.d. Opportunity Cost potential benefit that is lost or sacrificed whenzselecting one course of action makes it nec essary to give up a differentcourse of action.Opportunity cost is non recorded in the books of an organization, but isconsidered in every decision.e. Sunk Cost already incurred and cannot be changed by any decision made now or in the future. An irrelevant cost in decision-making.The econometrical influence which is utilise to analyze be is a model in which explanatory variable represents total be and endogenous variables represent genes that influence their level. Production total is the most measurable factor which follows the level of total cost. Total cost consist of both situationstotal fixed costs, which appear independently of the fruit step (when outturn level is zero)total variable costs, which are dependent nevertheless on the take quantityCost Function K = F + VX(Where K is total cost, F is Fixed Cost , V is variable quantity Cost and X is volume)What is cost account system and cost apportioning?(Managerial Accounting)SolCost accounting is linked to tax accounting, financial accounting and managerial accounting because it is an consequential component of from for each one one discipline as cost accounting involves determining the cost of well-nighthing, much(prenominal) as a product, a suffice, an natural action, a project, or rough different cost object. These costs are call for for several purposes. For example, the costs of products and services produced and sold are affected for both tax and orthogonal financial statements. In some otherwise words, tax and financial accounting depend on cost accounting to stand cost information. Information about costs is also needed for a variety of management decisions. For example, cost estimates are needed to keep an eye on whether or not a product or service can be produced and sold at a profit. Unit costs of a product (or service) are also needed for product pricing and product discontinuance decisions. In addition, accu place cost information is required to determine whet her or not a company should make (produce) or buy the new(a) materials, part and subassemblies that suffer part of its major products and services. From this perspective, cost accounting is perhaps underrated as a discipline since none of the other disciplines including tax accounting, financial accounting or managerial accounting could exist without cost accounting.The costs associated with a manufacturing firm are separated into two un particular(prenominal) categories. These include manufacturing costs and selling and administrative costs. This functional separation is all all-important(a)(p) because each form of cost is treated differently in the accounting records. The different treatments are required to obtain proper matching.Manufacturing Costs on that point are three types of manufacturing costs. These include 1) put material or raw material, 2) direct labor, and 3) indirect manufacturing costs, or factory overhead. Direct material frames the product, or sticks a part of the product. Direct labor converts the direct material into a finished product. Factory overhead represents all the other factory costs that cannot be directly identified with a particular product. This indirect category includes a variety of costs that are discussed in more(prenominal) circumstance in subsequent chapters. These three types of costs are also referred to as product costs, or inventorial costs, because they are capitalized in (or aerated to) the gillyflower, i.e., they become assets. interconnectedAccountants capitalize manufacturing costs to obtain proper matching. The matching sentiment is per spunking in accrual accounting and requires that costs and benefits are matched or brought unitedly on the income statement. In a production setting, the idea is to match the costs of producing a product (or service) against the benefits, i.e., revenue derived from the sale. When the gillyflower is sold, these costs are charged to an write down account refer red to as cost of smashings sold. At the end of the accounting period, cost of goods sold is c unloadd to the income summary where, theoretically, matching takes place. Remember that unexpired costs represent assets. Expired costs represent expenses. When the enrolment is sold, we theorize these costs take hold expired, i.e., the benefits to be obtained (from the effort that generated the costs) have been recognized. Thus, manufacturing costs become expenses when they reach cost of goods sold, but represent assets until the sale takes place.Selling and administrative CostsIn conventional accounting systems, selling and administrative costs are expensed in the period in which they are incurred. Theoretically, if there are future benefits associated with a cost, the cost should be capitalized as an asset quite an than expensed. Certainly there are some future benefits associated with costs such as research and development, training, market promotion and advertising. However, th ese costs are expensed as incurred because it is difficult if not impossible to relate them to the future benefits. As a result, these costs are referred to as period costs.COST BEHAVIOR AND prospicienceIn addition to separating costs into categories such as direct and indirect and manufacturing and non-manufacturing, costs are also ofttimes identified by their behavior in relation to changes in an body process level. This separation is helpful for proviso and budgeting purposes. The major types of costs, in wrong of cost behavior, are 1) variable costs, and 2) fixed costs, 3) semi-variable costs and 4) semi-fixed costs. These concepts are illustrated graphically in Exhibit 1-3 and discussed separately below.Variable CostsVariable costs are those costs that vary with changes in the level of natural process. Variable costs tend to increase at diverse rates that generate linear ( square(p) line) or a variety of non-linear cost functions when the costs are plotted on a graph. Th e major activity that affects manufacturing costs is production volume, i.e., producing produce. Production volume is frequently measured in terms of units produced, direct labor hours employ, machine hours used, materials costs or some other production volume related measure. However, other activities that are not related to production volume expertness also be important in analyzing cost behavior. The recognition that non-production volume related activities also cause, or drive costs is a fundamental idea associated with activity based be ( first rudiment)Fixed CostsFixed costs are define as those costs that do not vary with changes in the activity level. However, this does not mean that fixed costs remain constant. If a production volume based measure is used as the activity, a cost that changes for some reason other than a change in production activity is considered fixed. This simply means that the cost is driven by a non-production volume related phenomenon. For example, property taxes are considered fixed in traditional cost accounting systems that are typically based on production volume related activities. However, property taxes change when the taxing authority changes the tax rate or reassesses the property. The idea to grasp is that the designation of a particular cost as fixed or variable can change when it is analyzed in relation to a different activity. It is also important to understand that the notion of fixed and variable costs is a short run concept. All costs tend to be variable in the long run.Semi-Variable and Semi-Fixed CostsSemi-variable costs are part fixed and part variable. There is a minimum cost (the fixed portion) and a variable portion that increases as activity increases. There are also semi-fixed costs that do not change continuously as the level of activity changes, but do increase in steps as activity increases beyond mixed levels. These costs are one-time(prenominal)s referred to as step cost and step functions. For e xample, a single production supervisor (whos allowance publicly represents a fixed cost) might be adequate until production reaches a certain level, then a second supervisor would need to be hired. Supervisory costs might be driven by the number of production shifts.Cost accounting system requires five parts that include 1) an input measurement priming coat, 2) an history rating manner, 3) a cost collecting method, 4) a cost flow assumption, and 5) a capability of record inventory cost flows at certain intervals. These five parts and the alternatives under each part are summarized in Exhibit 2-1. Note that many possible cost accounting systems can be designed from the various combinations of the available alternatives, although not all of the alternatives are compatible. Selecting one part from each category deliver the goodss a basis for developing an exerciseal definition of a peculiar(prenominal) cost accounting system.1) INPUT MEASUREMENT BASESThe basis of a cost acco unting system begins with the type of costs that flow into and through and through the inventory accounts. There are three alternatives including pure historical be, normal historical cost and standard be.Pure Historical CostingIn a pure historical cost system, wholly historical costs flow through the inventory accounts. Historical costs refers to the costs that have been recorded. The term existing costs is sometimes used instead, but the term actual seems to imply that there is one true cost associated with a particular output. But determining the cost of a product, or service requires many cost allocations, e.g., allocating the cost of fixed assets to time periods, and allocating indirect manufacturing costs, or overhead to products. Since there are many alternative allocation methods, (e.g., straight line or accelerated depreciation) the calculated cost of a unit of product or service simply represents an attempt to approximate the true cost.Normal Historical CostingNormal historical costing uses historical costs for direct material and direct labor, but overhead is charged, or use to the inventory development a predetermined overhead rate per activity measure. Typical activity measures include direct labor hours, or direct labor costs. The amount of factory overhead charged to the inventory is determined by multiplying the predetermined rate by the actual quantity of the activity measure. The difference amongst the applied overhead costs and the actual overhead costs represents an overhead variance.Standard CostingIn a standard cost system, all manufacturing costs are applied, or charged to the inventory apply standard or predetermined prices, and quantities. The differences between the applied costs and the actual costs are charged to variance accounts as shown symbolically in the enlarged graphic below. The variances provide the basis for the concept of accounting control, that is somewhat different from the statistical control concept2) quadru ple INVENTORY VALUATION METHODSThe four inventory valuation methods that appear in Exhibit 2-1 are arranged in the order of the amount of cost that is traced to the inventory. The throughput method involves tracing the least amount of cost to the inventory, duration the activity based method includes tracing the greatest amount of costs to the inventory. In direct (or variable) costing, a greater amount of cost is traced than in the throughput method, but a lesser amount than in the well(p) assiduity method. Direct costing and full absorption costing are the traditional methods, while the throughput and activity based methods are relatively new. These inventory valuation methods are very important because they control the manner in which net income is determined. As we shall see is this chapter and subsequent chapters, the amount of net income can vary good for different inventory valuation methods.The Throughput MethodThe throughput method was developed to attendant a concept referred to as the theory of constraints. In this method only direct material costs are charged to the inventory. All other costs are expensed during the period. The concept is symbolized in the enlargement below. Sales, less direct material costs is referred to as throughput which reflects how the method got its name. The throughput method does not provide proper matching (as defined by GAAP) because all manufacturing cost, other than direct material are expensed when incurred rather than capitalized in the inventory. Therefore, the throughput method is not pleasurable for external reporting although advocates argue that it provides many advantages for inhering reporting.The Direct or Variable MethodIn the direct (or variable) method, only the variable manufacturing costs are capitalized, or charged to the inventory. Fixed manufacturing costs flow into expense in the period incurred. This method provides some advantages and some disadvantages for internal reporting. However, it d oes not provide proper matching because the current fixed costs associated with producing the inventory are charged to expense regardless of whether or not the output is sold during the period. For this reason direct costing is not generally delightful for external reporting.The Full Absorption MethodFull absorption costing (also referred to as full costing and absorption costing) is a traditional method where all manufacturing costs are capitalized in the inventory, i.e., charged to the inventory and become assets. This means that these costs do not become expenses until the inventory is sold. In this way, matching is more closely approximated. All selling and administrative costs are charged to expense. Technically, full absorption costing is required for external reporting, although many companies apparently use something less than a pure full absorption costing system. The full absorption method is also frequently used for internal reporting. The second major section of this ch apter compares the income statements for full absorption costing with those used for direct costing because they are by out-of-the-way(prenominal) the dominant methods.The Activity Based MethodActivity based costing is a relatively new type of procedure that can be used as an inventory valuation method. The technique was developed to provide more accurate product costs. This amendd accuracy is accomplished by tracing costs to products through activities. In other words, costs are traced to activities (activity costing) and then these costs are traced, in a second stage, to the products that use the activities. The concept of ABC is illustrated in the enlarged graphic below. Another way to express the idea is to say that activities consume resources and products consume activities. Essentially, an attempt is made to treat all costs as variable, recognizing that all costs vary with something, whether it is production volume or some non-production volume related phenomenon. twain ma nufacturing costs and selling and administrative costs are traced to products in an ABC system. Note that treating selling and administrative costs in this way is not acceptable for external reporting.3) FOUR COST ACCUMULATION METHODSCost compendium refers to the manner in which costs are collected and identified with specific customers, phone lines, batches, orders, departments and processes. The center of attention for cost hookup can be individual customers, batches of products that may involve several customers, the products produced at heart individual segments during a period, or the products produced by the entire plant during a period. The companys cost accretion method, or methods are influenced by the type of production operation and the extent to which flesh out cost accounting information is needed by management.Job dedicateIn job order costing, costs are compiled by jobs, orders, contracts, or lots. The key is that the work is done to the customers specification s. As a result, each job tends to be different. For example, job order costing is used for wind projects, government contracts, shipbuilding, automobile repair, job printing, textbooks, toys, wood furniture, office machines, caskets, machine tools, and luggage. Accumulating the cost of professional services (e.g., lawyers, doctors and CPAs) also fall into this category. Chapter 4 illustrates a cost accounting system that includes normal historical costing as the basic cost system, full absorption costing as the inventory valuation method and job order costing as the cost accumulation method.ProcessIn process costing, costs are accumulated by departments, operations, or processes. The work performed on each unit is standardized, or consistent where a continuous mass production or assembly operation is involved. For example, process costing is used by companies that produce appliances, alcoholic beverages, tires, sugar, eat cereals, leather, paint, coal, textiles, lumber, candy, co ke, plastics, rubber, cigarettes, shoes, typewriters, cement, bobbleoline, steel, baby foods, flour, glass, mens suits, pharmaceuticals and automobiles. Process costing is also used in meat packing and for public utility services such as water, gas and electricity.Back FlushBack flush costing is a modify cost accumulation method that is sometimes used by companies that scoop up just-in-time (JIT) production systems. However, JIT is not just a technique, or collection of techniques. Just-in-time is a very broad philosophy, that emphasizes simplification and continuously reducing waste in all areas of business activity. JIT systems were developed in Japan and depend on the communitarian concepts of teamwork and continuous improvement. In fact, many of the assumptions, attitudes and practices of communitarian capitalism are included in the JIT philosophy.One of the many goals of JIT systems is zero ending inventory. In a backflush cost system, manufacturing costs are accumulated in fewer inventory accounts than when using the job order or process cost methods. In fact, in extreme backflush systems, most of the accounting records are eliminated. The production facilities are also arranged in self contained manufacturing cells that are dedicated to the production of a single, or similar products. In this way more of the manufacturing costs become direct product costs and fewer cost allocations are necessary. Thus, more accurate costing is obtained in spite of the fact that the cost accumulation method is simplified. The just-in-time philosophy and related accounting methods are discussed in Chapter 8.Hybrid, or Mixed MethodsHybrid or mixed systems are used in situations where more than one cost accumulation method is required. For example, in some cases process costing is used for direct materials and job order costing is used for conversion costs, (i.e., direct labor and factory overhead). In other cases, job order costing might be used for direct materials, an d process costing for conversion costs. The different departments or operations within a company might require different cost accumulation methods. For this reason, hybrid or mixed cost accumulation methods are sometime referred to as operational costing methods.4) FOUR COST FLOW ASSUMPTIONSA cost flow assumption refers to how costs flow through the inventory accounts, not the flow of work or products on a production line. This distinction is important because the flow of costs is not always the same as the flow of work. The various types of cost flow assumptions include specific identification (e.g., by job), first in, first out, last in, first out and burden bonny.Costs flow through the inventory accounts by the job in a job order cost system which represents an example of specific identification. The requirements of the various jobs determines the timing of the cost flows. Simple jobs tend to go along through the system faster than more complex jobs. The first-in, first-out (F IFO) and weighted average cost flow assumptions are used in process costing. Since costs are accumulated by the process or department in a process cost environment, a cost flow assumption is needed to determine the treatment of the scratch line inventory. When FIFO is used, it is assumed that the units of product in the start inventory are finished first and transferred to the beside department before any of the units that are started during the period. The group of units in the beginning inventory maintain their separate identity and prior period costs. However, when the weighted average cost flow assumption is used, the beginning inventory units lose their separate identity because they are lumped together with the units of product started during the period. Process costing tends to be fairly challenging, therefore you may find these introductory concepts to be confusing.Although last-in, first-out (LIFO) is frequently used for tax reporting purposes, it is not normally used in the accounting records. For this reason, we consider the FIFO and weighted average cost flow assumptions in Chapter 5, but leave the LIFO cost flow assumption for courses that emphasize financial and tax reporting.5) RECORDING INTERVAL talentInventory records can be maintained on a incessant or a periodic basis. Conceptually, the unadulterated inventory method provides a company with the capability of maintaining continuous records of the quantities of inventory and the costs flowing through the inventory accounts. The periodic method, on the other hand, requires counting the quantity of inventory before inventory records can be updated. In the past, manufacturers tended to keep perpetual inventories, while retailers used the periodic method. However, today a variety of ultramodern point of sale devices and dedicated microcomputer software are promptly available to provide any company with perpetual inventory capability.Cost allocation is the assigning of a common cost to seve ral cost objects. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that use the system. A company with only one electric meter might allocate the electricity bill to several departments in the company.Allocation implies that the assigning of the cost is somewhat arbitrary. Some people define the allocation as the paste of cost, because of the arbitrary nature of the allocation. Efforts have been made over the years to improve the bases for allocation. In manufacturing, the overhead allocations have moved from plant-wide rates to departmental rates, from direct labor hours to machine hours to activity based costing. The goal is to allocate or assign the costs based on the root causes of the common costs instead of merely spreading the costs.Direct costs can be physically traced to each department.Indirect costs must be allocated. Many companies develop allocation methods to assign service department cost s to the producing departments. All organizations accumulate costs for their products or services for financial reporting purposes. An accounting system will assign to a departments output all its direct costs plus all the indirect costs allocated to it. A cost number one wood that has a logical, cause-effect relationship to the cost will be used as a cost-allocation base.Linking costs with cost objectives is accomplished by selecting cost drivers.When used for allocating costs, a cost driver is often called a cost-allocationbase. Major costs, such as newsprint for a newspaper and direct professionallabour for a law firm, may each be allocated to departments, jobs, and projects on an item-by-item basis, using demonstrable cost drivers such as tonnes of newsprint consumed or direct-labour-hours used. Other costs, interpreted one at a time, are not important overflowing to justify being allocated individually. These costs are pooled and then allocated together.A cost pool is a grou p of individual costs that is allocated to cost objectives using a single cost driver. For example, building rent, utilities cost, and janitorial services may be in the same cost pool because all are allocated on the basis of square metres of space occupied. Or a university could pool all the operating costs of its registrars office and allocate them to its colleges on the basis of the number of students in each faculty. In summary, all costs in a given cost pool should be caused by the same factor. That factor is the cost driver. Many different terms are used by companies to describe cost allocation in practice. You may encounter terms such as allocate, attribute, reallocate, trace, assign, distribute, redistribute, load, burden, apportion, and reapportion, which can be used interchangeably to describe the allocation of costs to cost objectives.The allocation of costs is necessary when the gene linkage between the costs and the cost objective is indirect. In this case, a basis for the allocation, such as direct-labour-hours or tonnes of raw material, is used even though its selection is arbitrary. A cost allocation base has been described as incorrigible, since it is impossible to objectively determine which base perfectly describes the link between the cost and the cost objective. Given this subjectivity in the selection of a cost-allocation base, it has always been difficult for managers to determine When should costs be allocated? and On what basis should costs be allocated? The answers to these questions depend on the principal purpose or purposes of the cost allocation.Costs are allocated for three main purposes1. To obtain want motivation. Cost allocations are sometimes made to influence management behaviour and thus promote goal congruence and managerial effort. Consequently, in some organizations there is no cost allocation for legal or internal auditing services or internal management consulting services because top management wants toencourage thei r use. In other organizations there is a cost allocation for such items to spur managers to make sure the benefits of the specified services fade the costs.2. To compute income and asset valuations. Costs are allocated to products and projects to measure inventory costs and cost of goods sold. These allocations frequently service financial accounting purposes. However, the resulting costs are also often used by managers in planning, performance evaluation, and to proceed managers, as described above.3. To justify costs or obtain reimbursement. sometimes prices are based directly on costs, or it may be necessary to justify an accepted bid. For example, government contracts often specify a price that includes reimbursement for costs plus some profit margin. In these instances, cost allocations become substitutes for the usual working of the marketplace in setting prices..What is activity based costing? (ABC system)?Sol In the past, the vast majority of departments used direct labour hours as the only cost driver for applying costs to products. But direct labour hours is not a very good measure of the cause of costs in modern, highly automated departments. Labour-related costs in an automated system may be only 5 percent to 10 percent of the total manufacturing costs and often are not related to the causes of most manufacturing overhead costs. Therefore, many companies are beginning to use machine-hours as their cost-allocation base. However, some managers in modern manufacturing firms and automated service companies believe it is inappropriate to allocate all costs based on measures of volume. Using direct labour hours or cost-or even machine hours-as the only cost driver seldom meets the cause/effect criterion in demand(p) in cost allocation. If many costs are caused by non volume-based cost drivers, Activity-Based Costing (ABC) should be consideredActivity Based Costing (ABC) is an economic model that identifies the cost pools or activity centers in an orga nization and assigns costs to cost drivers based on the number of each activity used. It identifies activities in an organization and assigns the cost of each activity resource to all products and services harmonise to the actual consumption by each it assigns more indirect costs (overhead) into direct costs.In this way, an organization can precisely estimate the cost of individual products and services so they can identify and eliminate those tha