Overview

 Accounting
-Records, Transactions, Reports
 Depreciation
-What It Is, Uses, Calculations
 Budgeting
 Overhead
-Calculations and Application
 Variance

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 1 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Harga Produk
 Record
 Survey Pasar, competitor
 HPP; Biaya operasional
 Rata2 UMR

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 2 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Accounting
 Analyzes Money Transactions
 Multiple Disciplines
 Cost Accounting
-Cost of Using Productive Assets
 Tax Accounting
-Tax Consequences on Business
 Accountant prepares:
-Balance sheet (Neraca)
-Statement of income (Pernyataan Rugi Laba)
-Information to aid the control of cost

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 3 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Accounting & Engineering
 Engineering
-Looks Ahead
-Cost Estimates BEFORE Things Happen
 Accounting
-Money Transactions That Have Happened
-Historical Records
-Incompatible Data Formats
 Engineering managers are responsible for budgets,
and the budgets are prepared using accounting rule.

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 4 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Product Costs, Period Costs and
Expenses
Product costs are costs associated with goods for sale until
the time period during which the products are sold, at
which time the costs become expenses.

Period costs are costs that are expensed during the time
period in which they are incurred.

Expenses are the consumption of assets for the purpose of

generating revenue.

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 5 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Cost Classifications on Financial
Statements – Balance Sheet

Merchandiser Manufacturer
Current Assets Current Assets
-Cash
 Cash
-Receivables
 Receivables
-Prepaid Expenses
 Prepaid Expenses
-Merchandise
 Inventories
Inventory Raw Materials
Work in Process
Finished Goods

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 6 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Manufacturing Costs

Direct Direct Manufacturing

Material Labor Overhead

The
Product

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 7 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Classifications of Costs in
Manufacturing Companies
Manufacturing costs are often
combined as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 8 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Manufacturing Cost Flows
Direct Material
Work in
Direct Labor Process
Inventory
Manufacturing
Overhead
Finished Cost of
Goods Goods
Inventory Sold

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 9 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Activities that cause costs to be
incurred are called COST DRIVERS
Cost Driver Examples
Activity Cost Driver
Machining operations Machine hours
Setup Setup hours
Production scheduling Manufacturing orders
Inspection Pieces inspected
Purchasing Purchase orders
Shop order handling Shop orders
Valve assembly support Customer
Requisitions
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 10 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Tugas
 Masing2 mencari laporan keuangan
perusahaan.
 Di list : isinya apa saja?
-Aset
-Arus Kas
-Laba
-Utang Piutang Perusahaan
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 11 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Cost Classifications

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 12 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Various Costs
Direct costs: Costs that can be easily and conveniently traced to a
product or department.
Indirect costs: Costs that must be allocated in order to be assigned
to a product or department.
Controllable and Uncontrollable Costs: A cost that can be
significantly influenced by a manager is a controllable cost.
Opportunity Costs: The potential benefit that is given up when one
alternative is selected over another.
Sunk Costs: All costs incurred in the past that cannot be changed by
any decision made now or in the future are sunk costs. Sunk costs
should not be considered in decisions.
Differential Costs: Costs that differ between alternatives.
Marginal Cost: The extra cost incurred to produce one additional unit.
Average Cost: The total cost to produce a quantity divided by the
quantity produced.
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 13 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Transactions
 Money (or Something of Value) Comes In or Goes
Out of the Company
 Recorded Twice (In 2 Accounts)
 Double-Entry Bookkeeping
 Accounts - Records of Like Transactions

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 14 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 “T” Accounts
 2 Columns
 Left Hand Column - Called “Debit”
 Right Hand Column - Called “Credit”
 Each Transaction Has a Debit In One Account
and a Credit In Another
 Debit and Credit have several meanings, exp:
-Debits increases assets and expense accounts
-Credits increase capital, liability and revenue accounts
 Double entry accounting is basic to B/S and I/S
 Note: Debit or Credit Have NO Value Meaning -
Credit Is Not Always Good
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 15 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 “T” Account Illustration

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 16 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 “T” Account In Practice

• F= Folio, cross-reference to another record

• Footing: summing the Debit and Credit and show the balance on
the larger side
• Evidence for any entry is found in the vouchers, invoices, receipts,
bills, sales tickets, checks and other documents

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 17 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Records
 Journals
-Chronological Record of Transaction
-Based on the evidence of the transaction
 Transaction “Posted” to Ledgers
 Ledger
-Group of Accounts

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 18 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
Transaction
Record Flow

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 19 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Accounting Conventions
 Money Measurement
-All Transactions Recorded in Money
 Accounting Equivalence
-Double Entry
-Total debits must equal or balance total credits:
 Assets = Liabilities + Owner’s equities
 Assets = Liabilities + Net Worth

-Creditors and owners have claim to equities but

the creditors have the first right
 Conservatism
-Record the Lesser Value

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 20 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 More Accounting Conventions
 Consistency
-Always Record Transactions the Same Way
-Example: Treatment of discount from prompt
payment
 Business Perspective:
-“Going Concern Fundamental”, business is
operated in a prudent and rational
-“Business-entity Fundamental”, transactions for
the Sake of the Business
 Cost fundamental: Use Cost Not Value
-Example: Business assets: market value vs replacement
cost or original cost
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 21 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Cash vs. Accrual
 Cash
-Transaction When Money Exchanged
-Individuals and Very Small Businesses
 Accrual
-Transaction When Earned
-Receipts at Shipment
-Payables When Material Received

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 22 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Revenue vs. Expense
 Business transactions are measured by the effect
to the net worth or services
 Revenue
-Money Received
-Increases to Net Worth
 Expense
-Costs Incurred
-Decreases to Net Worth
 If the transaction is irrelevant to the financial
results of the business, then there is discretion as
to how and when to record that event.
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 23 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Account Categories
 Asset
 Liability
 Net Worth
 Revenue
 Expense

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 24 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Chart of Accounts

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 25 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Assets
 Things with Dollar Value
 Company Owns
1. Current Assets:
- For Short Period
- Inventory accounts: Raw materials, in process goods,
and completed products
2. Fixed Assets:
-Longer Than 1 Year
-Office equipment, manufacturing equipment, building
-Land is non-depreciable asset
3. Intangible Assets: patents, copyrights
 Assets are capable of providing future benefits,
otherwise they are expense.
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 26 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Liabilities
 Debts the Company Owes
1. Current (Short Term) Liabilities
-Less than 1 year
-Accounts Payable (debts to creditors for materials etc)
-Short Term Loans
2. Long Term Liabilities (Debts)
-Over 1 Year
-Mortgages (debts to investors), Long Term Loans

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 27 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Net Worth
 Ownership Interest in the firm’s net assets
 Capital Stock
-Portion Paid In By Owners
 Retained Earnings
-Accumulation of Profits and Losses
 Example:
-Net worth of a business:
 Capital Stock (Modal) : $ 45,000
 Retained earnings (laba ditahan) : 4,000
 Total : $ 49,000
-Capital stock: portion of the net worth paid in by the
owner.
-Capital stock is divided into units of ownership, called
shares
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 28 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Revenues & Expenses
 Revenue
-Sales Income Before Deduction of Costs
-From sale of jobs, products or materials
 Expenses
-Costs of Doing Business
-Salaries, advertising, power and light, telephone, rent,
insurance, and interest
 Gross Income
Revenue – Expense

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 29 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Profit

 Gross Income – Taxes (sometimes called Net

Profit)
 Recorded on Profit and Loss Statement
 Contributes to Net Worth

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 30 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Financial and Operating Equation

Eq 4.2

Debit Indicates: Credit Indicates:

Asset increase Asset decrease
Liability decrease Liability increase
Net worth decrease Net worth increase
Revenue decrease Revenue increase
Expense increase Expense decrease
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 31 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Example of Transactions (Table 4.2 h.132)
Transaction Accounts Type of On Debit Credit
Affected Account Account ($) ($)
 
1. Company founded Cash Asset Increase 50,000
$50,000 capital stock  
Stock N-W Increase 50,000
 
2. Buy materials Inventory Asset Increase 10,000
on account, $10,000
 
Acct pay Liability Increase 10,000
 
3. Pay monthly rent Rent Expense Increase 1,500
on shop, $1500  
Cash Asset Decrease 1,500
     
Total 61,500 61,500

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 32 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Example of T-Accounts

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 33 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 34 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Balancing
 One transaction in the journal affects two
accounts, and because of this dual effect of a
transaction, FOR EVERY DEBIT, THERE MUST
BE A CREDIT
 An open account has either a debit or credit
balance, while a closed account has debit and
credit of the same amount.
 Number of Entries
-Debits MUST EQUAL Credits
-For All Accounts (Not in Each Account)
 Footing
-Find Difference Between Credit and Debit Totals In
Each Account
-Record In Positive Column
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 35 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Finish Balancing
 Balance In Each Account
-Debit
-Credit
-“Closed” (Debit = Credit)
 Balance the Books
-Sum of All Debit Accounts MUST EQUAL Sum
of All Credit Accounts
 The process of balancing (Equality) is periodically
done in a TRIAL BALANCE
 The periodic trial balance of the ledger provides
reasonable proof of the arithmetic of journalizing,
posting, and ledger account balance
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 36 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Table 4.4 page 135

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 37 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Statements
 Balance Sheet
- “Snap Shot” at a Point in Time
- Summary of Assets, Liabilities and NW
- Cash, receivables and inventories are valued at cost or
net realizable cash value according to the conservatism
convention
- Land is valued at the original amount
- Depreciable assets value = original cost – depreciation
- Value of Liabilities = cash amount required to liquidate at
the time of their maturity
- The NW is a conglomerate value = assets - liabilitiies
 Profit and Loss Statement
- Income and Expense Summary
- Over a Specified Period of Time
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 38 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Balance Sheet
XYZ Manufacturing Company
Balance Sheet
May 31, 20xx
   
Assets = Liabilities
Cash $15,000 Bank loan $15,000
Inventory 10,000 Mortgage 15,000
   
Land 15,000
 
Fixed Assets 40,000 + Net worth
   
Stock 45,000
 
______ Earnings 5,000
   
$80,000 $80,000
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 39 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Tabel 4.5

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 40 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Profit and Loss Statement
 Or Income and Expense Statement
 Is a summary of incomes and expenses for a
stated period
 Profit: Excess of Revenue Over Cost
-Including Depreciation and Taxes
 Loss: Excess of Cost Over Revenue
-Including Depreciation
-Taxes Are Not Owed In Loss Situation
 Profit/Loss Included In Net Worth

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 41 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Page 137

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 42 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 General Manufacturing Co.
Profit-and-Loss Statement
June 30, 20xx
Income    

 
Product income $11,000
Expenses    

 
Salaries $2,850
 
Rent 1,000
 
Advertising 800
 
Insurance 500
 
Depreciation 600
Total  
5,750
 
Gross profits $5,250
 
Taxes @ 23.8% 1,250
 
Profit (to retained earnings) $4,000
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 43 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Income Statement
 Net sales:
- Measure the net revenue from sales
- Deducted by allowances for sales recovers, freight out, and
sales discounts
 Cost of goods sold:
- Covers the expenses of the products sold to customer
- Freight in and purchase discounts may reduce the value
 Operating expenses:
- Recurring usual and necessary cost for conducting the
business
 Miscellaneous income and expense: interest & discount
 Depreciation: an allowable non-cash tax expense and
reduces total income
 Administrative expenses: heat, power, rent, insurance, etc
 Income taxes: Provision for income taxes
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 44 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Capital Assets
 Money Spent
-Larger Amounts
-Long Period of Use
 Fixed Assets: plants, equipments, computers,
trucks
 Contribute to revenue over long period
 Decreasing Value Over Time
-Physical Wear for Operation
-Obsolescence
-Regulations

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 45 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Depreciation
 Allocation of an amount of money over the
recovery life of an asset in a systematic way
 Accounting Charge
-Provides for Recovery of Capital Costs
-Over Time
 NOT a Cash Expenditure (Transaction)
-Money Spent is for Initial Acquisition
-Depreciation charges are the assignments of this initial
cost over the recovery life and do not involve a
periodic disbursement of cash
 Non-cash Deduction to Income Statement
-Largely for Tax Purposes, no real money transaction
happening
 Important part of overhead calculation
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 46 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Property (Assets)
 Depreciable property is used in the business or
held for the obtaining of revenue
 Life
-Longer Than One Year
-Economic Life  Physical Life
 Classification:
-Tangible: building, equipment, etc
-Intangible: designs, patents, copyrights
 Classification:
-Real
 Land Is Not Depreciated

-Personal property: equipment, machinery, vehicle

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 47 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Annual Depreciation
 In General
Eq 4.3
 Straight Line
-Simplest

Eq 4.4 Eq 4.5

Dj=Depreciation in jth year

P(j)= Percentage for year j for specified property class
P= cost of asset, Fs=Salvage value
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 48 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Definitions
 Salvage Value
-Value Left at End of Depreciation Life
-What Asset Could Be Sold for
 Book Value
Investment – Salvage – Depreciation

Examples on pages 142-143

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 49 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Straight Line Example
Original cost $ 100,000, salvage value = $ 10,000

Yr Cost –Salv. P(j), % Book Value Dj

   
0 $90,000 $100,000
 
1 20 100,000 $18,000
 
2 20 82,000 18,000
 
3 20 64,000 18,000
 
4 20 46,000 18,000
 
5 20 28,000 18,000
       
Total: $90,000

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 50 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Units of Production
 Principle:
- An asset wears out exclusively as demands are placed on it
- Expense varies directly with operation activity

- Page 143 and 144

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 51 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Accelerated Cost Recovery
 Costs Recovered More Quickly
 Allowed by Tax Laws
-Certain Methods
-MACRS (Modified Accelerated Cost Recovery System)
 Better Approximates Actual Life Cycle
 Helps Company Profits and Operations
 Align with the logic that the earning power of an
asset is created during its early service rather
than later, where upkeep costs tend to increase
progressively with age.

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 52 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Accelerated Recovery Rates
 Year 3-Year 5-Year 10-Year
1 33 20 10
2 45 32 18
3 22 24 16
 
4 16 14
 
5 8 12
   
6 10
   
7 8
   
8 6
   
9 4
   
10 2

See Table 4.7 on page 145

© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 53 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Accelerated Recovery Example
Cost of a 5 year property is $ 100,000. The property will be sold at
The end of the sixth year
Year Cost P(j) Book Value Dj
   
0 $100,000 $100,000
 
1 20 100,000 $20,000
 
2 32 80,000 32,000
 
3 24 48,000 24,000
 
4 16 24,000 16,000
 
5 8 8,000 8,000
       
Total: $100,000
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 54 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Budgeting
 Written Plan covering the activities of a business
 For a Future Period
 Based On:
-Cost Estimating
-Accounting Records
-Conjectures of Future Activity
-Budgeted cost unit should be the smallest unit
to which a cost can be clearly traces

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 55 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Budget Types
 Appropriation
-Proposed Expenditures
-Usually for Big Items (Building, Equip.)
 Fixed Budget
-For Departments with only one level of
throughput activity
 Variable (Flexible) Budgets
-Tied to Activity Levels
-Highlights Variations from Planned
-Intended for cost control of the activities of the
unit

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 56 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Cost vs.
General
Accounts

Tracing of cost flow

helps the management
of budgeting

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 57 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Budgeting: Overhead Calculation
 Usually 3 budgets that are assembled:
1. Production equipment
2. Labor
3. Factory
 Relationship exists between these 3 budgets and with direct
labor and direct material
 Objective: How much is the cost of producing the product in the
future?
 Cost of a product consists of:
- Direct labor
- Direct material
- Indirect cost of the business to bring the product to the market
 The purpose of overhead calculation is the connection of all
direct and indirect costs in a way that accurately reflects the
consumption of those future costs in the production of product.
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 58 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Budget (Physical Assets)
Center No. ft2 Hours Hp Hours Dep Tooling

Light 20 3,200 49,300 443,000 $52,500 $200,000

Heavy 2 3,400 6,800 748,000 95,000 80,000

 
Assy 15 1,100 17,000 24,000 10,000

Testing 8 1,700 13,600 68,000 22,500 65,000

   
9,400 86,700 1,283,000 $170,000 $355,000

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 59 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Budget (Labor Assets)
Center Wrkrs Wage Fringes Gross Direct Budget
($/hr) ($/hr) ($/hr) Hours Cost ($)

Light 58,000 1,613,560

29 21.40 6.42 27.82
Heavy 8,000 267,800
4 25.75 7.73 33.48
Assy 20,000 484,900
10 18.65 5.60 24.25
Test 16,000 417,040
8 20.05 6.02 26.07
     
Total 51 102,000 2,783,300

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 60 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 About Labor Costs
 Direct Labor Costs
-Uses Gross Hourly Cost Rate
 Utilization
-Attribute of Machines
-Percent of Possible Time In Use (100%)
 Efficiency
-Attribute of Labor
-Level and Amount of Effort
 Example: Budgeted direct labor hours are 15%
greater than machine hours, means that equipment
utilisation is 85% or it will be down 15%, but direct
labor will be on the job
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 61 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Annual Overhead
(Factory, Engineering and Management Budget)

Overhead Budget
 
Factory
Space $256,000
Utilities $239,625
Indirect labor $229,000
Tooling services $469,600
 
Engineering
 
$247,000
 
Management
 
$505,000
   

Total budget $1,946,225

© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 62 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Overhead
 Portion of the cost that cannot be clearly associated
with particular operation, product or project and must
be prorated among all the cost units on some arbitrary
basis
 Collect Costs
-Not Tied More Directly to Production
-Obtained from Budgets
 Distribute
-Rational Apportioning to Products
 Allow Accurate Estimates & Quotes
-Along With Direct Costs
-Example: Machine A $ 150,000, Machine B $ 15,000. It is
not right if the machine hour is charged the same rate,
using a burden rate of labor rate
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 63 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Collecting Overhead Costs
 Costs Tied to Production
-But Not to Specific Products
 General Costs
-Engineering
-Management
-Sales

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 64 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Allocating Overhead Costs
 Single Overhead Rate (Traditional)
- Divide Total Overhead Over Some Measure of
Production
- Example: A base for distribution of manufacturing
overhead maybe floor area, kilowatt hours, direct labor
hours, machine hours, or number of employees
-e.g. Per Direct Labor Hour (Burden)
- Misleading, Does Not Apportion Overhead as It Is
Used
- First distribution: no distinction between producing
department and management department
- Secondary distribution: Prorate the OH based on
number of employees, floor area, etc
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 65 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Allocation Basis
 Collect Overhead Charges
 Determine the Concurrent Basis
-Labor $, Hours, Prime Cost
 Calculate the Overhead Rate
 Apply the Rate

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 66 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Overhead Charges

E = now time
-1, -2 past periods
+1, +2 are forecasted
and budgeted for future
periods

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 67 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Basis
Basis: machine hours, direct
labor hours, or cost

Total area in overhead charges

divided by the area covered

Exp: Period 2-3, the area is 2.13

the area of the basis is 2. Then
rate is 1.065 (=2.12/2)

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 68 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Overhead Rate
The OH rate for period 2-3
is 1.065

Note that the actual charges,

basis and rates do not coincide
with the estimated value

The OH rate is used by

engineering

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 69 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Applying the Rate

Suppose that 4 units are

Required for period 2 and 3

The rate for period 2-3 is 1.065

then the OH is 4.260

The total cost is the basis cost

Plus the OH which is 8.260

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 70 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 1. Direct Labor Method

Rdl= overhead rate on the basis of direct labor, $

Co= overhead charges for a cost center, $
Cdl= direct labor, $
Rp= overhead rate on the basis of prime cost, $
Cp= prime cost, $ (direct material + direct labor)
Hdl= budgeted direct labor hours

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 71 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Single Rate Example
A company is asked to make and estimate and engineering estimates to
manufacture a design. Material per product costs $ 173.80 and 210
are to be made.
  Est. Wage Direct O/H O/H Total
Center Hours ($/hr) Labor ($) ($/hr) Costs ($) ($)
           
Light 7.31 27.82 203.36 24.23 177.12 380.49
Heavy 471.23 33.48 15,776.78 24.23 11,417.90 27,194.68
Assy 21.26 24.25 515.56 24.23 515.13 1,030.68
Test 7.93 26.07 206.74 24.23 192.14 398.88
         
Subtot 29,004.73
         
Mat’l  
($/unit) $173.80
           
Total
Mat’l 36,498.00
           
Total
Cost
© 2004 Pearson Education, Inc. 65,502.73
 
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 72 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 2. Productive Hour Cost Rate
 Collect O/H Charges by Category
 Apportion O/H Charges by Use
 Examples
-Maintenance to Equipment
-Management to Labor

Rmh=OH rate on the basis of

budgeted hour of machine or
equipment, or common grouping of
equipment
Hm= productive machine or
equipment budgeted time, hrs
PHCR=Machine hour cost rate + gross direct labor hourly rate
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 73 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Assignment to Centers
Center Dep Tooling Space Utilities
Light $52,500 $200,000 $87,149 $82,739
Heavy 95,000 80,000 92,596 139,703
 
Assy 10,000 29,957 4,482
Test 22,500 65,000 46,298 12,700
 
$170,000 $355,000 $256,000 $239,625
         

Allo- MACRS Directly Shop area HP Hr

cation assigned
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 74 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Assignment to Centers (con’t)
Center Indir Lab Tools Engr Mgmt Total O/H
Light $130,216 $162,146 $140,451 $292,763 $1,147,963
Heavy 17,961 273,781 19,373 48,589 767,003
Assy 44,902 8,784 48,431 87,980 234,538
Test 35,922 24,889 38,745 75,667 321,721
 
$229,000 $469,600 $247,000 $505,000 $2,471,225
           

 
Allo- DLHr HP Hr DLHr DL$
cation
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 75 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Productive Hour Cost Rate
 PHC = Machine Rate + Direct Rate
  Budget Machine Wages PHC
Center Total O/H hr $/hr $/hr $/hr
Light $1,147,963 49,300 23.29 27.82 51.11
Heavy 767,003 6,800 112.79 33.48 146.27
Assy 234,538 17,000 13.80 24.25 38.04
Test 321,721 13,600 23.66 26.07 49.72
       
$2,471,225 86,700

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 76 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Applying PHC Rates
Center Est Hrs PHC $/hr Cost, $/lot

Light 7.31 51.11 373.61

Heavy 471.23 146.27 68,926.81

Assy 21.26 38.04 808.73

Test 7.93 49.72 394.28

 
Subtotal 507.73 70,503.43
   
Material 36,498.00
   
Total 107,001.44
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 77 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Methods Comparison

 Traditional Single Rate

-Example Product Cost
 $65,503

 Productive Hour Cost Rate

-Example Product Cost
 $107,001

 Significant Potential Error

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 78 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Activity Based Costing (ABC)
 How to find variables that demonstrated cause
and effect for overhead charges
 This means that a cost driver, or a variable of
some kind must give rise to OH costs
 Volume Related Cost Drivers
- Number of Product Units Built Directly Effects Costs
 Non-Volume Related Cost Drivers
-Costs Not Effected by Number of Units
-Can Be Determined By Various Factors
-e.g. Engineering, Upper Management

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 79 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Volume Non-volume
Cost Direct labor hours Input
Drivers Machine hours Number of suppliers
Direct labor costs Number of engr changes
Production volume Number of sales orders
Kilowatt hours Output
Utilities Number of products
 
Inventory levels
 
Defect and scrap levels
 
Process
 
Number of schd changes
 
Amount of rework
 
Downtime
 
Number of material moves
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 80 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Calculation
 Sum Up Costs By Categories

Eq 4.13

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 81 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Variance
 Compare Budget to Actual Costs
 Variance Indicates Deviation from Plan
 Unfavorable Variance
-Actual Costs Exceed Standard Costs
 Favorable Variance
-Actual Costs Are Less Than Standard
-Not Always Beneficial to the Company

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 82 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Evaluation of Variance
 Unfavorable Variance
-Example Increased Cost Due to Higher Production
Than Planned
-Probably Results in More Profit for the Company
 Favorable Variance
-Could Be from Lower Number of Orders

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 83 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Finding the Variance

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 84 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Finding the Variance - Alt.

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 85 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Material Variance
 Total Is the Same
 Depends on Order of Calculation

Eq 4.14

Net material variance = Vm + V’m

Vm=variance for material owing to quantity change, $
V’m=variance for material owing to material cost/unit change,$
Na=actual quantity, units
Ne=estimate quantity number, units
Ce= estimated material cost per unit
Ca=actual material cost per unit
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 86 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Labor Variance
 Vl = (MHa – Mhe)Re
 V’l= (Ra – Re)Mha
 Net Labor Variance = Vl + V’l

Vl=variance for labor owing to difference from estimated lot hours, $

V’l=variance for wages owing to difference from estimated hourly rate, $
MHe=estimated hours for operation
Mha=actual hours for operation
Re=estimated labor wage rate, $/hr
Ra=actual labor wage rate, $/hr

Estimate wage rate is $28.76 and labor hours are 283

Actual wage and lot hours were $27.32 and 325
© 2004 Pearson Education, Inc.
Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 87 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Illustration

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 88 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Use of Variances

 Monitor and Control

-Find Causes of Variance
-Correct Causes or Budget Process
 Example
-Extra Production
 Scrap or More Orders

-Scrap is Production Problem

-More Orders Is Sales Forecast Problem

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 89 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management
 Summary
 How Accounting Works and Fits
 Working With and Impact of
Depreciation
 What a Budget Is, What It’s Used For
 Determine and Apply Overhead Rates
 Use Variance for Monitor and Control

© 2004 Pearson Education, Inc.

Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 90 of 88
Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management