Introduction to

Cost
Accounting

• Abshar Naufan 29120365

• M. Nadhif Arsyad 29120381
• Rizqi Ghani F 29120382
• Andika P. Pitono 29120575
 A Brief Introduction to Cost
Accounting
Uses of Information About Accounting for Costs
Costs
Performance Measurment,
01 03 Classifying Costs, Direct
Costs, Indirect Costs, etc
Product Costs, etc

Cost Behavior
Relation of Costs to Volume,
Variable Cost, etc
02
Some Uses of Information
About Costs
1. Evaluation
Problem 2. Estimation

Cost accounting system provide Cost accounting system provide

information for evaluating the information for estimating the
performance of an costs of units of product or
organizational unit. service.
 3. Performance Measurement
Performance Measurement provide information on the
achievement of established objectives, efficiency of operation,
and opportunities for cost control or cost reduction. Performance
reports are used for both information and performance
measurement and evaluation
1.
4.
Inventory Cost
Product Costs and the Cost Of Services
 Cost accounting system must measure all of the costs of the manufacturing process and assign some part of those
costs to each of unit of product
2. Profitability Analysis

 Information on costs is indispensable for analyzing the profitability of a product or product line

 Product cost information allows managers to evaluate contribution margin and gross margin
3. Product Mix

 Information about costs is a key to managing the mix of products or services offered to customers or clients
4. Pricing

• Product costs and trends in product costs often provide signals to managers that prices should be changed
5. Cost of Service

• Information about cost of service is as important to managers as product costs.

 Cost Behavior
• Need for understanding, using, or designing cost
accounting or cost management system
• Because prices of resources change as time
passes
• Understanding the effect of changes on costs is
essential to measuring, analyzing, and using
information about costs
 Relation of Costs to Volume
Variable Costs
• A cost which changes in strict
proportionality with volume.
• If volume increases by 50%, a
variable cost will increase in total
by 50%.
Nonvariable Costs
• A cost that does not vary at all
with volume.
• The change of nonvariable costs
that occur from time to time do not
depend on the volume of activity
Semivariable Costs
• Many costs include a combination of
variable costs and nonvariable costs
• These costs varies in the same direction
as volume, but less that proportionately
with changes in volume
Chunky Costs
• often costs are assumed to be variable
when they actually are incurred in
chunks.
 Accounting for Costs
Classifying Costs
1. Direct Costs
• Can be traced to
• Caused by a product,
project, or activity
2. Indirect Costs
• Cost cannot be traced
directly to a single
product, project, etc
Accounting for Direct Accounting for
Costs Indirect Costs
• All the cost
accountant has to do is • Costs must be collected
keep track of how and associated with
much material and activities before they
labor cost is used to can be assigned to
producing each unit of products
product
Introduction to
Cost-Accounting
Systems
 Cost-Accounting Systems

01 Recognize, measure, record, and report cost and

associated nonfinancial information related to a
company’s activities,

02 Each item, unit, or activity for which costs are

measured is referred to as a cost object.

The output of cost systems is used for both

03 financial-reporting and management-accounting
purposes.
 Cost Systems
Cost systems are based on a simple design. In order
to cost a cost object, the costs to be assigned are
divided into two categories—direct and indirect
costs. Direct costs are traced directly to cost objects.
Indirect costs are allocated to cost objects using cost
pools.
 Cost System

Direct Cost Cost Pools

Costs that can be traced directly Grouping costs into each
in an economical and feasible department for different
manner to a cost object. purposes

Indirect Cost Cost Object

Costs related to a cost object The final product of the
that cannot be classified as costs incurred
direct costs.
 Example Of Direct & Indirect Cost

Direct Cost Indirect Cost

• • Utilities
Manufacturing supplies
• • Office supplies & Technology
Equipment
• • Marketing campaigns
Raw materials
• • Labor costs (Worker that don't
Labor costs (workers who
directly handle production) directly handle direct materials
• • Insurance costs
Other production costs
• Administration cost
Cost-System Structure Process
 Direct and Full Costing Systems
Cost systems are classified by the way that direct material and direct labor are identified with
specific products. Direct material and labor costs are those material and labor costs that can be
specifically traced to the item being costed in an economically feasible way.

The two basic approaches are:

1. Job-order cost system

2. Process cost system

 1. Job order Cost System
In a job-order cost system the principal cost object is the job or order. Where a production
process is on the basis of individual job orders or the products are produced in batches, some
type of job-order cost system can be used.

A job-order system requires three things:

1. Each job or batch must be given an identifying symbol

2. All material put into a process must be identified with a specific job or batch

3. All direct labor must be assigned to a specific job or batch

The Basic Structure of a Job-order Cost System
 2. Process-cost systems
The units of production are the principal cost object in a process-cost system. If a manufacturing
facility employs continuous processing, and if each operating department produces a reasonably
homogeneous product.
The Basic Structure of a Process-cost System
 Indirect Manufacturing Costs
Indirect costs (sometimes called overhead and burden) are costs that cannot be directly traced to a
specific product in an economical manner. These costs must be allocated to products. The general goal
of cost allocation is to assign indirect costs to a particular cost object using an allocation basis that
links the indirect cost to the cost object in a meaningful and systematic manner.

There are three steps in developing a system for allocating indirect costs:

1. The selection of appropriate cost pools

2. The direct tracing of all indirect costs to cost pools

3. The allocation of cost-pool costs to the cost object

 The manufacturing
department’s weekly total
indirect costs of $20,000

Have been assigned by direct

tracing to two cost pools—Cost
Pools A and B.

Cost Pool A’s indirect costs to

products is direct labor hours.
Cost Pool B’s indirect costs are
assigned using machine hours.
,
Assume Parts X and Y are
produced by the manufacturing
department

How were the two cost-pool

allocation bases calculated?
How were the indirect costs per
unit determined?
The Indirect Cost-Allocation System
 Standard Costs
Estimates of what a product should cost. Bills of material for each product are prepared and
priced. Direct labor minutes are developed for each operation, preferably on the basis of time
and motion studies, and these labor times are multiplied by the appropriate labor rates. Standard
indirect costs per unit of production are also developed.

1. When standard costs are used, material, direct labor, and indirect costs are charged to work
in process at the actual costs incurred

2. The cost of work in process is transferred to the finished inventory account at the standard
cost for the products actually produced

3. The amount remaining in the work-in-process inventory is called a variance and is charged
to the variance account
Assume that in the month of
January, A: 1,000 units,
B: 2,000 units, and C: 3,000
units were produced.

The following actual costs

were incurred:
direct material, $12,000;
direct labor, $12,000; and
overhead, $25,000.

An analysis of monthly cost

performance is shown
below. How were the total
standard costs for material,
labor, and indirect costs
calculated
 Advantages of Standard Costs over Historical
Costs
1. Recordkeeping Efficiency: In standard cost systems, actual costs are not identified by product; they are
charged only to departments. Products move from the work-in-process inventory to finished-goods
inventory at standard cost. Thus, it is necessary to know only the number and type of product completed
by each department.

2. Cost Inefficiency: With standard costs, finished-goods inventories are valued at standard, and costs in
excess of standard are identified as variances and can be written off against profits in the period in which
they were incurred or carried forward to future periods to offset expected future variances.

3. Evaluation: Standard cost systems provide a means for evaluating manufacturing managers. Ideally, a
standard cost should represent the potential efficiency of an operating facility
 The Behavior
03 of Costs
 Classification of Costs

1. Fixed costs
2. Variable Costs
3. Step Costs
4. Semi-Variable costs
 Fixed Costs

Defined as costs that don’t change despite changes in volume within the relevant range. The
example of fixed costs is rent costs, depreciation costs, interest costs, etc
 Variable Costs

Defined as a cost which changes directly and proportionately with changes in volume. If
volume is doubled than the variable cost will also double. For example, operational cost paid
monthly such as sales commission, cogs etc.
 Step Costs

Defined as costs items which are incurred in large volume. Step costs changes in large
amounts. When the demand > production than they should increase the volume of the
production that needs more costs.
 Semi-Variable Costs

Combination of fixed and variable costs. Semi-variable costs response to volume changes but
doesn’t change in direct proportion to changes in the activity level. Semi-variable costs can be
separated into a fixed and variable component as in a decomposition of semi-variable costs.
Modeling the cost structure of the firm
 Additional note on costs classification
1. Fixed Vs Variable Costs
• The first step in classifying costs as fixed or variable, is to locate all costs which are contractually or physically defined and easily traceable. Beyond
such easily identifiable patterns, it is often necessary to use engineering studies of the production process.

2. Full costs per unit Vs. Fixed and Variable Costs

• It is worthwhile to separate between fixed and variable costs rather than full costs, because full costs per unit only valid at one specific volume, time
period, and other assumption such as linear relationship to the volume index, relevant range, and external condition. If we use full costs per unit basis,
we can impose a risk of faulty decision making, as explained by this graph
Modeling the financial structure of the firm
 Case Study:
Cool Move Unlimited
 The Story

David Dalberg, a second-year university student, is planning to start a business as a

distributor of a portable air conditioner called Cool Move Unlimited. He planned to hire five
students to help him in operational side, while he handles other business tasks by himself. He
found a wholesaler as a supplier that can give him a wholesale price of $384, so that he can
quote his product at $480. To start with, David took a $6,000 loan from his parents and he
will pay them back 1% interest ($60) and repay the principal in 4 months. He planned to
purchase his own product, and after 4 months he would like to sell it for $200. He budgeted
$85 for advertisement and $20 for supplies and miscellaneous expenses. He would pay $10
rent to his parent, but when his sales is exceeding 250 unit, he will rent another storage space
for $60. David plan to pay his friends $440 per month with a 5% ($24) sales commissions.
From this short business, David hope to get $850 per month or as the same as if he would get
from a regular summer job.
 Transaction Breakdown

Time Period
Four-month period

Volume Index
A retailer of a single product

Investment
$6000 capital investment
$384 Air Conditioner
 Transaction Breakdown
Fixed Costs
Loan amounting: $60 per month
Depreciation on the portable air conditioner: $46 per month [($384-$200)/4 months)
Promotion: $85 per month
Supplies $20 per month

Variable Costs
$384 per unit air conditioner

Step Costs
$10 per month rent incurred from zero to 250 units range, rent will be $70 per month

Semi-Variable Costs
Salary $440 per month for five salespeople. Total $2200 per month
Bonus $24, commission per unit sold
 Transaction Breakdown
Total Fixed Costs
Within the relevant range of zero to 250 units, total fixed costs:
Interest $60
Depreciation $46
Promotion $85
Supplies and Miscellaneous $20
Rent $10
Sales Salaries $2,200

Total Fixed Costs $2,421

Beyond the 250-unit level of sales, total fixed cost would rise to $2,481 per month with addition extra rental payment for storage space.
 Transaction Breakdown
Unit Variable Cost
Cost of Goods Sold $384
Sales Commission $24

Unit Variable Cost $408

Revenue
$480 if a 20% margin maintained
 Cost Volume Profit & Contribution Analysis
Contribution analysis is a logical extension of the cost-volume-profit model, it will show the relationship between sales volume, selling price, variable costs, and fixed
costs. It is one of the most frequently used management accounting tools that can help for analyzing product pricing, subcontracting, and special orders.

Unit contribution is the benefit that the company received from making the sale
less the variable costs incurred

Unit Contribution = Selling price – Unit Variable Cost

Total Contribution = Unit Contribution x Q

Profit = Total Contribution – Total Fixed Costs

Contribution Margin Ratio = Unit Contribution / Selling Price

Total Contribution Margin Ratio = Total Contribution / Total Revenue

 Benefit of understanding unit contribution
In general, unit contribution gives manager an alternative view of daily operation, in term of costs as
follows:

1. Total fixed cost represents the overhead expenditure necessary to commence operation and staying in
business, regardless the volume of the sales, so
2. Company should generate more total contribution to cover its fixed costs. Any addition of unit sold
after the fixed cost is covered, it represents a profit for the company.
3. Company should at least price its product so that they have a positive contribution, (selling price >
Variable cost)
4. In a short run, firm should focus more on maximizing total contribution
5. In a short run, it is not very meaningful to think about the full cost and full cost per unit, as mentioned
before full cost per unit can be misleading, since it does not really related to any individual unit .
 Cool Move Unlimited Example

Unit Contribution = Selling price – Unit Variable Cost

Unit Contribution = $480 – $408 = $72
Total Contribution = Unit Contribution x Q
Total Contribution = $72 x 60 = $4,320
Profit = Total Contribution – Total Fixed Costs
Profit = $4,4320 - $2,421 = $1,899
Contribution Margin Ratio = Unit Contribution / Selling Price
Contribution Margin Ratio = $72 / $480 = 0.15
Total Contribution Margin Ratio = Total Contribution / Total Revenu
Total Contribution Margin Ratio = $4,320 / $28,800 = 0.15
 Breakeven Analysis
Breakeven analysis is a management tool that helps manager to find the level of output at which total contribution is equal to zero or in another words, it will cover the
total fixed cost. Breakeven analysis is modeled based on CVP analysis.

Profit = Total Contribution – Total Fixed Costs

0 = (Contribution Unit X Q) – Total Fixed Costs
Break even volume = Total Fixed Costs / Unit Contribution
 Types of Breakeven Analysis

1. Breakeven Volume
2. Breakeven Market Shares
3. Breakeven Capacity
4. Breakeven Sales in $
Utilization
5. Breakeven Sales with multiple product
6. Cash Flow Breakeven
Target Profit Breakeven