Universidad Tecnológica de Coahuila

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1 Universidad Tecnológica de Coahuila Production Cost Accounting Class Presented by: Lic. Celina A. Fernandez Jimenez December 11, 2013

2 OBJECTIVES: General Objective: To know the basic tools used by cost accounting to generate the information to be used in decisions-making, its function and relationship with financial accounting and management accounting. Specific Objective: The student will be able to: Make difference between cost accounting and financial accounting Make difference between cost accounting and management accounting To understand and define the cost accounting concept and its function To mention the cost accounting benefits To distinguish the differences between cost and spend To understand in a general way the cost accumulation process of a manufacturing enterprise To mention and define the different cost classifications To know the important points to consider when making a product cost.

3 CONTENT: FINANCIAL ACCOUNTING CONCEPT COST ACCOUNTING CONCEPT MANAGEMENT ACCOUNTING CONCEPT COST ACCOUNTING BASIC CONCEPTS FORMULAS FOR COST ACCOUNTING BASIC CHARTS PROCESS COST EXAMPLES

4 ACTIVITIES: TO READ AND UNDERSTAND THE CONCEPTS FOR FINANCIAL, MANAGEMENT AND COST ACCOUNTING TO IDENTI FY THE DIFFERENCES BETWEEN THE FINANCIAL, MANAGEMENT AND COST ACCOUNTING. TO REVIEW THE BASIC CHARTS OF A MANUFACTURING PRODUCTION PROCESS TO LEARN THE BASIC FORMULAS OF COST ACCOUNTING PROCESS TO REVIEW CHARTS TO UNDERSTAND COST PRODUCTION PROCESS TO WORK ON EXAMPLES TO PRACTICE COST PRODUCTION PROCESS, ASSETS, SHEET BALANCES, ETC.

5 FINANCIAL ACCOUNTING It is an element series such as registration rules, accounting criteria, presentation forms, etc. It Expresses in quantitative and monetary terms transactions made by an entity, to provide useful and secure information to people making-decision. MANAGEMENT ACCOUNTING All the tools of the administrative subsystem get together in the management accounting, this is an information system forwarded to make all functions easier to plan and control, also for making-decisions. This accounting shows the budget preparation, production cost and evaluation. COST ACCOUNTING This is a system that has techniques and procedures used to quantify the economic sacrifice incurred by a business to generate incomes of making inventories.

6 FINANCIAL ACCOUNTING Balance Sheet Assets * Inventories MANAGEMENT ACCOUNTING Liabilities Owner s Equity Income Statement COST ACCOUNTNG Sales - Sales Cost * Inventories = Profit Supports Financial Accounting - Expenses = Net Income

7 Cost Accounting allows the inventory value process of materials, product in process and finish goods to be presented in Balance Sheet. 1. In the Income Statement the cost accounting makes interference in cost determining for sale costs. 2. It helps in evaluation of business by reviewing the profits generated by areas. 3. Provides bases for tools aplication by administrative accounting, such as breakeven, etc. COST PRODUCTION ELEMENTS Direct Material + Direct Labor + Indirect Costs = Production Cost

8 There are four basic types of cost that accountants need to keep in mind direct, indirect, fixed, and variable costs. They are defined as follows: Direct costs: Direct costs can be directly traced to the product. Material and labor costs are good examples. Indirect costs: These can t be directly traced to the product; instead, these costs are allocated, based on some level of activity. For example, overhead costs are considered indirect costs. Fixed costs: Fixed costs don t vary with the level of production. A good example is a lease on a building. Variable costs: Unlike fixed costs, variable costs change with the level of production. For example, material used in production is a variable cost. Every cost can be defined with two of these four costs. For example, the cost to repair machinery is an indirect variable cost. You decide if the cost is direct or indirect, and if the cost is fixed or variable.

9 Checking out cost accounting basics Just like in any discipline, you use specific cost accounting terms and ideas to communicate meaning and understand procedures. Understanding basic concepts in crucial, so to start using cost accounting analysis, you should be familiar with these terms: Contribution margin: This term is defined as sales minus variable cost. When you subtract your fixed costs from contribution margin, the amount left over is your profit. Breakeven point formula: The breakeven point is the level of sales where your profit is zero. The breakeven formula is sales minus variable cost minus fixed cost. You multiply your sales per unit by units sold. You also multiply the variable cost per unit by the same units sold. The sales level that makes the formula equal to zero is the breakeven point. Relevant range: Relevant range is a term that relates to machinery, equipment, or vehicles in your business. Think of relevant range as the maximum level of use for the item you operate in your business. Say you use a sewing machine. As long as you operate the machine at or below the relevant range, it should operate normally. The machine s cost should come in at the level you expect. If you operate above the relevant range, the machine won t operate as you expect. You need to invest in a second machine to operate above the relevant range.

10 Digging deeper into cost accounting analysis As you further your study, you use more complex cost analysis tools. From job costing to variances, the more involved the job, the more involved your cost accounting tools become. Here are some important tools you ll use: Job costing: This method of costing assumes that every customer job is different. Plumbers and carpenters are good examples of businesses that use cost accounting. Because every job is different, each customer job is assigned material, labor, and overhead costs. Process costing: Companies use process costing when partially completed units are moved from one production area to another. Process costing assumes that the products you produce are similar or even identical. Variance: A variance is a difference between your planned or budgeted cost and your actual results. A favorable variance occurs when your actual costs are less than your budgeted or planned cost. An unfavorable variance is when actual costs are higher than planned. Inventoriable costs: These are costs that are directly related to the product. Production costs are inventoriable costs for a manufacturer. If you are a retailer, your cost to purchase inventory is also an inventoriable. Other costs you incur for goods are included, such as shipping and storage costs.

11 Must Know Formulas for Cost Accounting To reduce and eliminate costs in a business, you need to know the formulas that are most often used in cost accounting. When you understand and use these foundational formulas, you ll be able to analyze a product s price and increase profits. Breakeven Formula Profit ($0) = sales variable costs fixed costs Target Net Income Target net income = sales variable costs fixed costs Gross Margin Gross margin = sale price cost of sales (material and labor) Contribution Margin Contribution margin = sales variable costs Pre-Tax Dollars Needed for Purchase Pre-tax dollars needed for purchase = cost of item (1 - tax rate) Price Variance Price variance = (actual price - budgeted price) (actual units sold) Efficiency Variance Efficiency variance = (Actual quantity budgeted quantity) (standard price or rate) Variable Overhead Variance Variable overhead variance = spending variance + efficiency variance Ending Inventory Ending inventory = beginning inventory + purchases cost of sales

12 EJEMPLO Cía X S.A. de C.V. Income Statement 1 de Enero al 1 Diciembre de 2013 Total Sales $121, Sales Cost ($ 94, ) Profit $ 26, Operation Expenses ($ 10,114.00) Operation Profit $ 16, Financial Expenses ($ 2,760.00) Profit befor taxes $ 13, Taxes ($ 2,782.00) Final Profit $ 11,280.00

13 SUPPORT SUGGESTIONS: Spanish English Dictionary English English Dictionary Internet EVALUATION CRITERIA: According to FDA-84 Form provided. REFERENCES: CONTABILIDAD DE COSTOS / ALSO S. TORRES/ MCGRAW HILL COSTOS I / CRISTOBAL DEL RIO GONZALEZ/ ECAFSA INTERNET /CONTABILIDAD FINANCIERA / GERARDO CANTU, NORA E. ADRADE DE GUAJARDO/ QUINTA EDICION INTERNET /

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