Cost Accounting Fundamentals Essential Concepts and Examples Second Edition Steven M. Bragg Copyright © 2011 by Steven M. Bragg. All rights reserved. Published by Steven M. Bragg, Centennial, Colorado. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to Steven M. Bragg, 6727 E. Fremont Place, Centennial, CO 80112. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. ISBN-13: 978-0-9800699-1-4 Printed in the United States of America Course Information Course Title: Cost Accounting Fundamentals Learning Objectives: Describe the situations in which we use cost accounting. Describe the role of the cost accountant. Explain how and when to compile inventory costs using different costing methodologies. Describe when to use job costing, and how to compile the cost of a job. Describe when to use process costing, and how to use the various methods for compiling process costs. Describe when to use standard costing, create standard costs, and calculate variances from stand- ards. Describe the various methods for allocating joint costs, as well as the proceeds from by-products. Explain the proper accounting for various types of spoilage, rework, and scrap. Explain the types of costs to include in the formulation of a product price, and the circumstances under which these costs may be included or excluded. Demonstrate how to use cost accounting in the development of new products. Describe how transfer pricing works, and the impact of using different transfer pricing methods. Explain how direct costing can be used as an analysis tool. Demonstrate how activity-based costing can be used as an analysis tool. Describe the concept of the constraint, and how to use constraint analysis to properly analyze various management decisions. Explain the various methods for reviewing a capital budgeting proposal. Demonstrate how to create a cost accumulation system. Describe the variability of costs under different circumstances. Explain the types of quality costs and how to accumulate them. Prerequisites: None Program Level: Overview Program Content: Cost Accounting Fundamentals addresses all aspects of cost accounting, including how to compile inventory costs, when to use job costing, process costing, and standard costing, and how to allocate joint costs. We also explain how to use cost accounting in the development of new products and their prices, as well as how to conduct analyses with direct costing, activity-based costing, and constraint analysis. Advance Preparation: None Recommended CPE Credit: 16 hours Table of Contents Chapter 1 - Overview of Cost Accounting .................................................................................................................. 1 Introduction ......................................................................................................................................................................... 1 Financial Reporting ........................................................................................................................................................... 1 Management Reporting .................................................................................................................................................... 1 Problem Resolution ........................................................................................................................................................... 3 Price Setting ........................................................................................................................................................................ 4 Cost Investigation .............................................................................................................................................................. 4 Budget Formulation ........................................................................................................................................................... 5 Constraint Analysis ........................................................................................................................................................... 6 Cost Accumulation Systems ........................................................................................................................................... 6 Summary .............................................................................................................................................................................. 6 Review Questions .............................................................................................................................................................. 8 Review Answers ................................................................................................................................................................. 9 Chapter 2 - The Cost Accountant Job Description ................................................................................................. 10 Introduction ....................................................................................................................................................................... 10 To Whom Does the Cost Accountant Report? ......................................................................................................... 10 What Are the Principal Accountabilities of the Cost Accountant? ..................................................................... 10 What Are the Qualifications of a Cost Accountant? ............................................................................................... 12 Who Does the Cost Accountant Supervise? ............................................................................................................. 12 Summary ............................................................................................................................................................................ 13 Review Questions ............................................................................................................................................................ 14 Review Answers ............................................................................................................................................................... 15 Chapter 3 - Inventory Valuation .................................................................................................................................. 16 Introduction ....................................................................................................................................................................... 16 Valuation Step 1: The Quantity of Inventory on Hand ............................................................................................ 16 The Periodic Inventory System..................................................................................................................................... 16 The Perpetual Inventory System .................................................................................................................................. 17 The Gross Profit Method ................................................................................................................................................ 18 Valuation Step 2a: Inventory Costing .................................................................................................................................. 19 The First In, First Out Method .............................................................................................................................................. 19 The Last In, First Out Method ........................................................................................................................................ 20 The Weighted Average Method..................................................................................................................................... 22 Standard Costing ............................................................................................................................................................. 23 The Retail Inventory Method ......................................................................................................................................... 23 Valuation Step 2b: Inventory Costing ......................................................................................................................... 24 Job Costing .......................................................................................................................................................................