Showing posts with label Cost accounting. Show all posts
Showing posts with label Cost accounting. Show all posts

December 18, 2024

Kaizen Costing, KAIZENshiro and Kaizen Cost Management

Top 100 Management Theory Article


                                        Narayana Rao K.V.S.S. on Cover Page of Business Today 
October 22 - November 6, 1997


Prof. Yasuhiro Monden and Prof. Kazuki Hamada explained  the key points in Toyota’s  Cost Management System in  book entitled “Toyota Management System: Linking the Seven Key Functional Areas”.

In the text of the book the authors talk about the basics of Target Costing (Toyota calls it Genka Kikaku) and Kaizen Costing (Genka Kaizen). Toyota puts a lot of work into  planning the cost and monitoring  actual costs associated with a vehicle. Just as industrial engineers watch  every second  on the shop floor to identify waste, every dollar in a component is analyzed for improvement in vehicles as well. Accounting and measurement alone will not produce results.  Measurement is just a piece of the improvement process  just as “Check” is only a part of the Plan-Do-Check-Action cycle for improvement. A critical piece of Toyota’s strength in terms of financial results lies in the realm of the overall cost planning process and the structured VA, VE, & VI activities that occur during the life cycle of the program.
https://www.theleanedge.org/2386-art-smalley-financial-benefits/  Not available now.



In the Japanese language Kaizen Costing is called ‘Genkakaizen’ with ‘genka’ meaning ‘cost’, ‘kai’ meaning ‘change’ and ‘zen’ meaning ‘good’. In other words Kaizen means change to good ways and good results. In english it is termed  continuous improvement.  Imai (1986) in his glossary of terms defines Kaizen in relation to the workplace as meaning ‘continuous improvement involving everyone – managers and workers alike’. Imai (1986) argues that a Kaizen strategy involves relatively small improvements. Monden and Hamada (1991, p. 17) suggest that ‘Kaizen Costing is the system to support the cost reduction process in the manufacturing phase of the existing product … Kaizen refers to continuous accumulations of small betterment activities rather than innovative improvement’. They also argue that target costing and Kaizen Costing can be linked together and ‘constitute the total cost management system of Japanese companies’


Kaizen eno Yon Dankai - Improvement in 4 Steps - History of Kaizen in Japan


Kaizen costing is variant of standard costing. Standard costing specifies a cost target for the production team for the coming period. Normally standard cost is set for an year. It will be revised every year. It is constant for an year as a planning device. Any variances from it are examined and the reasons are identified and understood.

Kaizen costing is cost planning that incorporates kaizen philosophy or philosophy of continuous improvement and implementation of the principles of learning effect.

According to learning effect principle, the average cost of an item is certain percentage of average cost of earlier volume. It is expressed  as  volume of production and sales doubles(X becomes 2X), the average cost of total sales (2X) is say, 90% of the average cost of producing and selling X units. There is a learning effect in every activity undertaken by the organization right from the lowest cadre employee to the CEO and Board and cost comes down.

Japanese implemented this cost reduction philosophy in a systematic manner. They made planned reductions in the standard costs of an item every year. So the production and sales team have to plan their department and activity cost to achieve reduction in standard cost. The idea was extended by them to monthly costs. They said we cannot achieve cost reduction in one day. So having a standard cost for an year and then asking for reduction in it next year is not the right approach for cost reduction. They came with a reducing cost target for every month. Such a reducing cost target for every month demands some effort on cost reduction by departments every month. Hence cost reduction is on the monthly agenda of every department in the company. Kaizen costing is providing the monthly cost target information and accounting for actuals during the month.



KAIZENshiro Budgeting


KaizenShiro Cost = Cost of Non-Productivity  = Cost of Not-Improving-Productivity





Total cost of an organization has KaizenShiro Cost. If  KaizenShiro cost is estimated, plans to identify projects that reduce it can be developed and implemented. Kaizen cost management is driven by KaizenShiro projects. Project identification and formulation is driven by KaizenShiro cost.



KAIZENshiro Budgeting is  the new paradigm for planning and developing synchronous and profitable operations for Speed-Based Target Profit Planning (SBTPP).  KAIZENshiro Budgeting is  budgeting the projects to  cost of losses and waste, which  are feasible to be improved for the year for which the budgeting is done.  Improvement is achieved by developing  and implementing  the most effective and efficient Strategic KAIZEN and KAIKAKU projects, supported by daily improvements of Gemba kaizen. Thus engineering inventions and innovations are utilized as well as ideas of shop floor operators, supervisors and engineers who are focusing on delivering to market demand utilzing the shop and supply chain capacity.






Kaizen Cost Management





For More Detailed Reading


Kaizen Costing and Value Analysis

Control Measures for Kaizen Costing - Formulation and Practical Use of the Half-Life Model

Introduction to Kaizen Budgeting

 B. Modarress;  A. Ansari; D. L. Lockwood,  “Kaizen costing for lean manufacturing: a case study” International Journal of Production Research, Volume 43, Issue 9 May 2005 , pages 1751 - 1760.




Included in Knol Handbook of Industrial Engineering - 2019

Index of articles on Cost Accounting, Costing and Cost Management


Full List of Articles on Kaizen

Kaizen eno Yon Dankai - Improvement in 4 Steps - History of Kaizen in Japan

Rules for Successful Kaizen Management


Kaizen - Engaging Front-Line Staff in Continuous Improvements - Industrial Engineering

Leading and Managing Kaizen Events

Agile Kaizen

Kaizen - The Japanese Style Productivity Improvement Methodology

Industrial Engineering is Kaizen in Engineering

Kobetsu Kaizen - Focused Improvement of Machine and Machine Work in TPM

Front Line Kaizen for Product and Process Industrial Engineering


Gadget-based improvement is widespread as improvement activities that can not only eliminate losses but also inspire the workplace.

Karakuri Kaizen - Introduction

Industrial Engineering is Kaizen Engineering

Toyota Kaizen Methods: Six Steps to Improvement - 2010 - Book Information

Kaizens - Production Improvement Ideas Implemented - India - Kaizen Eye

Kaizen Assembly: Designing, Constructing, and Managing a Lean Assembly Line - Book Information

Kaikaku: The Power and Magic of Lean : a Study in Knowledge Transfer - 2004 - Norman Bodek - Book Information


_________________________________________________________________________________


Originally published on Knol
http://knol.google.com/k/narayana-rao/kaizen-costing-and-kaizen-cost/2utb2lsm2k7a/  381  7500+ page views


Updated on 19.12.2024,   9.11.2024,  8 May 2019, 27 January 2012


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Cost Behavior Analysis and Relevant Costs Concept


Cost behavior is identified by estimating cost functions. Cost function is mathematical relationship between cost and the level of an activity. Examples of activities used in cost accounting to develop cost functions are units of output, direct manufacturing labor hours, machine hours etc. A cost function can be depicted on a graph by showing activity level on the x-axis and cost on the y-axis.

Two basic assumptions are used in estimating cost functions.


1. Variations in the cost under consideration are explained by variations in the level of a single activity (Single activity is sufficient to capture the variation in the cost).
2. Cost behavior is adequately approximated by a linear function within the relevant range. (Even though the function is shown on the graph from zero to infinity, the decision maker knows that the graph is valid only between some range and not from zero to infinity).

Cost Estimation Procedures


1. Industrial Engineering Method
2. Conference Method
(W. Wichelll, Realistic cost Estimating for Manufacturing, 2nd ed., Society for Manufacturing Engineers, Dearborn, Michigan, 1989)
3. Account Analysis Method
4. Quantitative Analysis Method
a. High-Low Method
b. Regression Analysis

Learning Curves


Learning has an effect on efficiency and productivity. The effect was first identified and described in aircraft industry. As workers become more familiar with their tasks, their efficiency improves. Managers learn how to improve the allocation and scheduling of the work among available operators and machines. Some of the machines are provided facilitating devices like jigs and fixtures to increase production. As a result of improved efficiency, unit costs decrease as output increases. This effect is nonlinear and in cost estimating for future this effect needs to be considered.


Cost estimation related thesis at Ohio



Originally posted at
http://knol.google.com/k/narayana-rao/cost-behavior-and-cost-estimation/2utb2lsm2k7a/3158



Ud. 19.12.2024
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September 1, 2024

Costing for Quality, Time and the Theory of Constraints



Cost Accounting and Cost Measurement for Poor Quality Related Costs



Companies that fail to achieve quality at design level to provide as per customer requirement will fail in the market place. Also if the production system is unable to produce as per the design specification, spoilage will occur, rework will occur and failure of the product at the customer's place occurs sooner than expected.  Failure at the customer's end results in customer dissatisfaction, return of the product for repairs and bad word of mouth for the brand. Rework results in extra costs of production. Spoilage is also a loss due to material loss, labor loss and overhead loss associated with the spoilage. As the costs of poor quality are understood and quality improvement methods have evolved, accounting for poor quality related costs also emerged.

Cost of quality framework

Cost of quality framework states that quality can be improved by improving design and production processes and this will reduce appraisal costs, internal failure costs and external failure costs. Also increase in appraisal cost has the potential to reduce internal and external failure costs. To see this phenomenon in practical real life situations, cost accountants are being asked to prepare poor cost of quality statements showing the amount spent on each category of the following costs.

Prevention costs

Appraisal costs

Internal failure costs

External failure costs

Then quality managers and engineers or industrial engineers can come out with plans to increase prevention costs and appraisal costs and decrease internal and external failure costs. Needless to say engineering or managerial economics requires that incremental cost incurred must be less than the benefit realized that is decrease in total failure costs.

Cost accountants have to take the cost of quality categories as cost objectives and provide cost figures for them.


Seven Step Activity Based Costing for Determining Cost of Quality


1. Identify the Cost Objects - Concerned product, total cost of quality, individual category of cost of quality

2. Identify Direct Costs - There are no direct costs related to cost of quality

3. Select the Cost Allocation Bases to Use for Allocating Indirect Costs of the Product - For quality related work design hour, inspection hour, rework hour, were taken as cost allocation bases. In the case of external failure there is cost of transporting the item back to the company. For this a transport event is taken as the cost allocation base.

4. Identify the Indirect Costs Associated with Each Cost Allocation Base - Total cost incurred in product design, process design, inspection, rework due to internal and external failure, transport of customer returns are accumulated.

5. Compute the Rate Per Unit of Each Cost Allocation Base - For each activity, total quantity of performance (cost allocation base) is determined and it is used to divide total cost incurred to get the rate per unit of each cost allocation base,

6. Compute the Indirect Allocated to the Product - Compute the quantities of each cost allocation base related to poor quality used by the product.  Multiplying quantity with the corresponding rate per unit of the collection base will give the indirect to be allocated to the product for that allocation base.

7. Compute the Total Cost of the Cost Object: In our case of cost of quality is the cost object and we add all items of cost of quality framework to get total cost of quality.


Nonfinancial Measures of Quality

Nonfinancial measures are also important and their importance is brought into limelight by the balanced score card approach, Cost and management accountants have also a role to play in recording data of nonfinancial measures and creating statements of these measures.

Nonfinancial measures of customer satisfaction as index of quality

1. Market research studies on customer preference and satisfaction with specific products and product features.
2. The number of defective units reported by customers as a percentage of products shipped.
3. The number of customer complaints in a period say a month
4. Percentage of products that experience a early or excessive failure
5. Delivery delays - Percentages - Highest number of days
6. On-time delivery rate



Reference
Horngren, Foster, Datar,  Cost Accounting: A Managerial Emphasis, 10th Edition, Prentice Hall Inc., 2010


Updated2.9.2024,  3 May 2017, 6 May 2015
First Published 8 December 2011


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April 23, 2022

Introduction to Cost Terms - Review Notes

Cost: Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount (or money) that must be paid to acquire goods and services.

Budgeted cost is provided in the plan. Forecasted cost is an estimate. Actual cost is the cost actually incurred at the time of transaction.

Cost Object: Cost object is anything for which a separate measurement of cost is desired.

Cost System: A cost system accumulates costs and the assigns them to various cost objects.

Cost accumulation is the collection cost using documents like purchase orders, invoices, various expense vouchers, and issue receipts of materials, wage and salary schedules. These documents are entered in journals and ledgers like the financial accounting or book keeping procedure.

Cost assignment is a term that encompasses both (1) tracing accumulated costs to a cost object, and (2) allocating accumulated costs to a cost object.

Direct cost: Directs of a cost object are related to the particular cost object and they can be traced to the cost object through accounting documents as and when they are incurred in an economically feasible way.

Indirect cost: Indirect costs are also related to the cost objects but they cannot be identified with cost objects at the time they are incurred in an economically feasible way. Hence they are accumulated without explicit reference to the cost objects at the time they are incurred and then allocated to various cost objects at a later date to find out the costs of cost objects.

Variable cost: A variable cost with reference to a cost object changes in total in proportion to changes in the level of total activity or volume of output. With reference to an automobile, petrol is an example of variable cost. If one drives more, more petrol is consumed.

Fixed cost: A fixed cost remains unchanged for a given time period despite changes in the level of activity or volume of output. Insurance premium for a car, an annual tax for a car can be given as examples. They are not related to the distance traveled by a car in a period.

Cost driver: Cost driver is a factor, that has a causal relation with a cost over a given time span. In the case of variable costs, activity volume or output volume are cost drivers. that is at the total variable cost level, more output would mean more total cost.

Fixed cost: Fixed cost has no cost driver in the short term. But in the long term it also has cost drivers.

Inventoriable costs: These costs are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold.

Period costs: These costs are treated as expenses of the period in which they are incurred because it is presumed that they do not benefit future periods.

Prime cost and conversion costs are terms used in manufacturing companies. Prime costs are all direct manufacturing costs. Conversion costs are all manufacturing costs other than direct material costs.

Overhead cost: Costs which are not directly related to the production of goods being produced and sold are classified under overhead costs. They are essential for the production and selling process but they are not accounted directly on the job cards or batch cards of the goods being produced and sold.


Refer for More Detailed Explanation
Horngren et al. Cost Accounting, 13th Edition, Pearson Education
Cost Accounting - Horngren et al., Book Information and Review

Originally published at
http://knol.google.com/k/narayana-rao/  cost-terms-and-concepts/   2utb2lsm2k7a/1210

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Role of Costing and Cost Accounting in the Organization

Purposes of Accounting Systems

Accounting is a major means of helping managers of an organization, equity investors of an organization, potential equity investors, creditors and bond holders of an organization, potential creditors and bond holders of an organization, suppliers and customers of an organization and other stake holders to take decisions.

Accounting provides information for three major purposes:

1. External reporting: These reports are used investors, creditors, government authorities, and other outside parties.

2. Routine internal reporting: These reports which are periodically generated are used by managers of the company for their internal decisions.

3. Non-routine internal reporting: This information or reports are generated to support projects and other decisions that come up as the need arises from them.

While the reports are prepared in different formats and basic data is manipulated or summarized in various ways to facilitate decision making, there is one data base maintained by the accounting system that contains data in the form debits and credits to various accounts maintained in the accounting system. Accountants combine these data items in various ways to provide information to internal or external users.


Distinction Between Financial Accounting, Cost Accounting and Management Accounting

Horngren’s distinction between them is interesting.

Management accounting as a discipline focuses on accounting information that facilitates decision making by managers of the organization. If focuses on routine and non-routine accounting reports.

Financial accounting measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP). Executive compensation is tied to profit figures reported in the financial statements and equity share valuation is also based to a large extent on these financial statements.

Cost accounting provides information to facilitate both management accounting and financial accounting. Its focus is measuring and reporting financial and nonfinancial information that is related to the cost of acquiring or consuming resources by an organization.


Cost Management

Cost management is an activity of managers related to planning and control of costs. Managers have to take decisions regarding use of materials, processes, product designs and have to plan costs or expenses to support the operating plan for their department or section. All these activities come under cost management. Information from accounting systems help managers in cost management activities. But the cost accounting system and the reports it generates is not the cost management system. Accounting system can be interpreted as a part of cost management system of an organization.

Cost management is not cost reduction alone. It is much broader. Organization increase advertising expenditure to increase sales, increase research and development expenditures to promote new products. Here the concerned managers are deliberately incurring additional costs in a period (compared to the previous period) as they expect profits from such decisions or expenditures. Cost management system has to ensure that a cost is incurred with the expectation of profit.

The Role of Management Accounting

The role of management accounting is also described as problem solving, score keeping and attention directing.

Problem solving: The role of accounting in problem solving is to provide information useful in evaluating alternatives.

Scorekeeping: Scorekeeping records the results of various actions of the managers and helps in assessing whether the results expected from the various actions are realized or not.

Attention directing: The scorekeeping function in combination with expected results, and comparative analysis of scores of various companies, divisions and departments, comparative analysis of present period scores or results with previous periods show opportunities of focusing attention of managers to improve things.

Value Chain

Value chain is a visualization of complete business as a sequence of activities in which usefulness is added to the products or services produced and sold by an organization. Management accountants provide decision support for managers in each activity of value chain.

Design of Management Accounting System

The design of management accounting system has to take into consideration the decision needs of the managers. Also it has to take into consideration the new themes and challenges that managers face currently.

Horngren identified four such themes in the tenth edition of his book.

1. Customer focus: The challenge for managers it invest sufficient resources to enhance customer satisfaction. But every action of the organization has to result enhanced profitability or maintained profitability for the organization.

2. Key Success Factors: These are non-financial factors which have an effect on the economic viability of the organization.

Cost, quality, time and innovation are important key success factors. Management accounting systems need to have provisions for tracking the performance of the organization and its divisions as well as competitors on these success factors.

3. Continuous improvement: Continuous improvement or kaizen is a popular theme. Innovation related to this area in costing is kaizen costing .

4. Value Chain and Supply Chain Analysis: Value chain as a strategic framework for analysis of competitive advantage was promoted by Michael Porter. Management accountants have to become familiar with the framework and provide information to implement the framework by strategic planners.

The term supply chain describes the flow of goods, services and information from cradle (the mines sources of raw materials) to grave (where discarded products or dumped), regardless of whether those activities occur in the same organization or many organizations.

Key Guidelines for Management Accounting System Design

Cost Benefit Approach: In the system design resource allocation decisions are to be made. Examples would be software to buy and associates to employ. A cost-benefit approach should be used for all such decisions. Resources should be spent only when there is profit to the organization due to that expenditure. Each incremental addition to the accounting system must be supported by incremental profit to the organization.

Behavioral and Technical Considerations: Management has human dimension and it has to focus on how to help individuals to do their jobs better. Managing people involves discussion of managers with his associates on improving performance. The behavioral responses of people to reports highlighting their underperformance have to be understood. Management accounting should lead to cordial relations and climate.

Different Costs for Different Purposes: It is to be noted that there are several cost concepts and cost measures can be created for each of these concepts. Cost accountants have to careful to provide appropriate cost to the managers. The accounting system has to have some precautions to make sure that the accountant understands the decision situation of a manager and provides appropriate cost measures.

Professional Ethics

Like other professionals, accountants also face ethical dilemmas. They need ethical guidelines. Institute of Management Accountants (IMA), USA published guidance note on ethics to be followed by management accountants.

Competence, confidentiality, integrity and objectivity are important themes of the guidance note.

Role of Cost Information - 2019 Illustration


Cost Information for Zero-Based Productivity Management of Supply Chain - McKinsey Way Supply Chain Industrial Engineering

https://nraomtr.blogspot.com/2019/04/zero-based-productivity-management-of.html

McKinsey consultants recommend start by breaking costs into four crucial categories—direct labor (including equipment), indirect labor (including equipment), warehouse and logistics, and materials  (including conversion yields)—and building  a bottom-up view on the existing cost base. The category which may have the highest opportunity  varies by industry and type of manufacturing. In more automated settings or continuous manufacturing, equipment category may have higher opportunity. Direct-labor may be more important in  manual assembly to find savings opportunities.

Establishing granular transparency


Companies have to  seek  granularity into costs. This  visibility of lower and lower level costs, gained by aggregating ledger account data from internal sources and benchmarking data from external sources, enables organizations to establish relevant benchmarks across spending categories. Data is collected from existing recorded data  and is augmented by specially made cost studies using  observations and targeted sampling where data is lacking. The  data has to point out  regulatory and customer special requirements, which act as constraints in the problem. 

References

Horngren, Charles T., George Foster, and Srikant Datar, Cost Accounting: Managerial Emphasis, Tenth Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey, USA, 2000

Cost Accounting - Horngren et al., Book Information and Review

Updated on 24.4.2022,  2 May 2019, 8 December 2011

Originally posted on Knol
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January 5, 2022

Job Costing and Process Chart Costing - Review Notes

Job Costing System

In this system of costing, the cost object is an individual unit of product or service, batch, or lot.  A classic example is an order based job made for a specific customer. Hence the name job costing.

Relevant Cost Concepts

Cost object
Direct cost of a cost object
Indirect cost of a cost object

Cost pool:  Cost pool is grouping of individual cost items. It can be very broad comprising of hundreds of cost items. Or it can be narrow having only two items

Cost-allocation base: Cost allocation bases are used to link an indirect cost pool to a cost object. Usually cost drivers are used as cost allocation bases. Horngren gave the example automobile operating cost of an organization. The cost driver is number of miles traveled. Number of miles traveled is used as a cost allocation base. Different jobs are charged for automobile cost on the basis of number of miles traveled by the persons of the organization in producing and delivering the job.

Relevant Costing Concepts

Actual Costing:  Actual costing is costing method that traces direct costs to a cost object by using actual direct-cost rate of cost item times the actual quantity of the direct-cost input (item) and allocates indirect costs based on the actual indirect-cost rate (rates in case multiple indirect cost pools are there) times the actual quantity of the cost-allocation base (appropriate base when multiple cost pools are used).

Normal Costing: In this method of costing, direct costs are traced to cost object in the same manner as in actual costing. But indirect costs are allocated on the basis of budgeted indirect-cost rate and the actual cost quantity of cost allocation base.

Source Documents in Job Costing

An accountant in financial accounting system makes entries on the basis of some source documents and journal and ledger are the main registers for accounting entries.

Similarly cost accounting is also based on source documents and records.  A key document or record or account in cost accounting is job cost record (or job cost sheet). It records and accumulates all the costs assigned to a specific job as resources were consumed in producing the goods and services specified in the job. Hence, the job cost record is started as soon as the work begins on a particular job.

Each entry in a job cost record is based on a source document.

Materials from the store are ordered by the manufacturing engineers using a materials requisition record. This form is the source document for charging job cost records and department for the cost of direct materials used on a specific job.

For recording direct labor related costs in job cost record, labor-time record is the source document.  Each employees of the organization can have a labor time record and the time that he spends on various jobs is recorded on a daily basis on this record.  The cost per hour of each employee is determined and accordingly labor cost is recorded in job cost records. 

The indirect cost items are given standing order numbers and standing order cost records are maintained for them. Based on materials requisition records and labor-time records costs are charged to standing order cost records.

Special attention needs to be paid to the accuracy of the source documents as the accuracy of job cost records depends on the reliability of inputs.

Seven Step Procedure of Job Costing

Step 1: Identify the chosen cost object. The specific jobs for which job cost is to be ascertained is to uniquely identified and a job cost record is to be opened for each job.

Step 2: Identify the direct costs of the job: The job number is to be mentioned in the material requisition record and labor-time records. From these source documents, the job cost records are to be posted or charged with direct costs.

Step 3: Select the cost allocation bases to use for allocating indirect costs to the job.

Step 4: Identify the indirect costs associated with each cost allocation base.

Step 5: Compute the rate per unit of each cost-allocation base.

Step 6: Compute the indirect costs allocated to the job.

Step 7: Compute the total cost of the job by adding all direct and indirect costs.

Journal and Ledger Entries in Cost Accounting

Like in financial accounting, in cost accounting also journal and ledger are maintained.
Job costing system has a separate job cost record for each job and entries are made in it for each cost item charged to it. A summary of the job cost record is posted in a subsidiary ledger. In the general ledger, Work-in-Process Control Account is there and it presents the totals of the separate job cost records pertaining to all unfinished jobs.

A general ledger account with control in their name or title signifies or indicates that they are supported by underlying subsidiary ledgers that have additional details. Materials Control Account and Accounts Payable Control Account are additional examples of control accounts. Material Control Account has a subsidiary ledger – Stores Ledger that has detail on each type of material stored and used in the company. Accounts Payable Control Account has a subsidiary ledger that has accounts of individual suppliers.

Horngren has given examples of transactions to illustrate the use of journal entries in cost accounting.

1. Purchases of materials on credit $89,000

Materials Control A/c Dr.   $89,000
 To Accounts Payable Control     $89,000
2. Materials issued to manufacturing departments: direct materials: $81,000, and indirect materials $4,000
Work-in Process Control A/c   Dr.   $81,000
Manufacturing Overhead Control A/c  Dr.         4,000
 To Materials Control      $85,000

3. Total manufacturing payroll or salaries and wages: Direct $39,000 and indirect, $15,000
Work-in Process Control A/c   Dr.   $39,000
Manufacturing Overhead Control A/c  Dr.       15,000
 To Materials Control      $54,000

Summary

The important points to be remembered from this chapter or topic are the method of arriving at job cost and method of arriving at indirect cost of a job. There are source documents and from these source documents job cost record is prepared and this record will show the cost of a job. Journal and ledger are kept and the ledger will show the value of inventory in the form of material, work-in process and finished goods.

Costing Process Charts


We can take the  process described in a process chart for a discrete industry product as the cost object and determine the final cost of the product and also provide the cost of various components that go into the product. We can cost measurements for various elemental inputs that go into each part and into the assembly operations. Such measurements will guide process cost analysis to reduce the cost of the whole process by reducing the cost at element level, part level and operation level as feasible.

Process charts can be operation process charts of flow process charts. Operation process charts contain only material transformation operations and inspection operations. Hence the operation chart costing will show the cost spent for material transformation and inspection operations.

Flow process chart will also depict material transport cost between machines and departments, warehousing costs and cost of delays. Hence costing of flow process chart will provide the total cost of tranferring a finish item to the store for either despatch or for further internal processing.

References

Horngren, Charles T., George Foster, and Srikant Datar, Cost Accounting: Managerial Emphasis, Tenth Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey, USA, 2000


Videos on Job Costing
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Additional References on Job Costing
(References added on 13 September 2018)


https://saylordotorg.github.io/text_managerial-accounting/s06-02-how-a-job-costing-system-works.html

Job Costing System in Indian Railway Workshops
http://www.indianrailways.gov.in/railwayboard/uploads/codesmanual/MechDept/Mechanicalch9_data.htm

Chapter of Book on Net - on Job Costing
http://www.unf.edu/~dtanner/dtch/dt_ch34.htm

Chapter 1 of the book   http://www.unf.edu/~dtanner/dtch/dt_ch1.htm

https://www.leveragetech.com.au/blog/sap-business-one-and-enprise-a-perfect-match-for-your-job-costing-requirements/

Updated 6.1.2022,   23 April 2015
First published  8 Dec 2011


originally posted in Knol
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January 3, 2022

Cost Accounting - Introduction

Included in IE Online Course as Lesson 274

Cost accounting measures and reports financial and nonfinancial information that relates to the cost of acquiring or consuming resources by the organization.

Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount (or money) that must be paid to acquire goods and services.

___________________________________________________________________
Cost accounting measures and reports financial and nonfinancial information that relates to the cost of acquiring or consuming resources by the organization.

Cost Terminology

Cost is a resource sacrificed or forgone to achieve a specific objective. It is usually measured as the monetary amount (or money) that must be paid to acquire goods and services.

Budgeted cost is provided in the plan. Forecasted cost is an estimate. Actual cost is the cost actually incurred at the time of transaction.

Cost Object: Cost object is anything for which a separate measurement of cost is desired.
A cost system accumulates costs and the assigns them to various cost objects. This cost accumulation process follows the financial accounting system process of documents of financial transactions, journal entry, ledger entry. In ledger accounts, cost accounting system require more accounts that deal with various cost centers of the organization.

Cost accumulation is the collection cost using documents like purchase orders, invoices, various expense vouchers, and issue receipts of materials, wage and salary schedules. These documents are entered in journals and ledgers like the financial accounting or book keeping procedure.

Cost assignment is a term that encompasses both (1) tracing accumulated costs to a cost object, and (2) allocating accumulated costs to a cost object.

Direct cost: Directs of a cost object are related to the particular cost object and they can be traced to the cost object through accounting documents as and when they are incurred in an economically feasible way.

Indirect cost: Indirect costs are also related to the cost objects but they cannot be identified with cost objects at the time they are incurred in an economically feasible way. Hence they are accumulated without explicit reference to the cost objects at the time they are incurred and then allocated to various cost objects at a later date to find out the costs of cost objects.

Variable cost: A variable cost with reference to a cost object changes in total in proportion to changes in the level of total activity or volume of output. With reference to an automobile, petrol is an example of variable cost. If one drives more, more petrol is consumed.

Fixed cost: A fixed cost remains unchanged for a given time period despite changes in the level of activity or volume of output. Insurance premium for a car, an annual tax for a car can be given as examples. They are not related to the distance travelled by a car in a period.

Cost driver: Cost driver is a factor, that has a causal relation with a cost over a given time span. In the case of variable costs, activity volume or output volume are cost drivers. that is at the total variable cost level, more output would mean more total cost.

Fixed cost: Fixed cost has no cost driver in the short term. But in the long term it also has cost drivers.

Inventoriable costs: These costs are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold.

Period costs: These costs are treated as expenses of the period in which they are incurred because it is presumed that they do not benefit future periods.

Prime cost and conversion costs are terms used in manufacturing companies. Prime costs are all direct manufacturing costs. Conversion costs are all manufacturing costs other than direct material costs.

Overhead cost: Costs which are not directly related to the production of goods being produced and sold are classified under overhead costs. They are essential for the production and selling process but they are not accounted directly on the job cards or batch cards of the goods being produced and sold.

References
Cost Accounting: A Managerial Emphasis, Charles T. Horngren, George Foster, and Srikant M. Datar, Prentice Hall Inc.,2000


Video Lecture by Prof Bassell On Cost Classification and Terminology

___________

___________

Index of articles on Cost Accounting, Costing and Cost Management
Cost Accounting, Costing and Cost Management - Article Directory
Originally posted at
http://knol.google.com/k/narayana-rao/cost-accounting-introduction/ 2utb2lsm2k7a/  265


Ud 4.1.2022
Pub 28.1.2021
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June 29, 2020

Financial - Cost and Management Accounting - Subject Update Articles




                                      Narayana Rao K.V.S.S. on Cover Page of Business Today 
October 22 - November 6, 1997



2020

Video Lectures on Financial Accounting by Prof. Elbarrad
https://www.youtube.com/channel/UCXQAlFxCIlihCazcGq65wBA


Cost Effective Supply Chain
Brand owners require effective processes for collecting and managing cost data from manufacturing partners, item suppliers and logistics partners at the individual item and bill-of-material (BOM) levels. E2open’s Cost Management application enables multi-tier cost capture and management by providing a single view of BOMs, cost forecasting and rebate management. The result is efficient, optimized processes and lower supply chain costs.
https://www.e2open.com/intelligent-applications/supply-management/cost-management/

2019

Bain and Company
______________

______________



Save-to-transform as a catalyst for embracing digital disruption
Deloitte's 2019 Global Cost Survey
Cost-management remains a strong imperative around the world.
https://www2.deloitte.com/us/en/pages/operations/articles/global-cost-management-survey.html

Strategic Cost Transformation - Capgemini

https://www.capgemini.com/wp-content/uploads/2017/07/Strategic_Cost_Transformation.pdf

Manufacturing cost transformation

Situation
Our client, which primarily serves coal power generators, faced a unique set of market challenges driven by fossil fuel price and regulatory uncertainty:
https://www.strategyand.pwc.com/power-utilities/infrastructure-mining/casestudy/cost-transformation

Cost Transformation


We help you embark on major cost reduction—without losing focus on profitable growth.
https://www.atkearney.com/operations-performance-transformation/cost-transformation

IBM: Cost transformation for the digital era


In the new digital era, the classical dichotomy of grow and invest, or reduce costs has changed and it’s no longer an either/or choice. Organizations have new opportunities to identify cost take-out, rethink operational efficiency and fund growth from the inside out.
https://www.ibm.com/thought-leadership/institute-business-value/report/cognitive-cost

How do you take your enterprise cost reduction strategy from alienating to engaging?
https://consulting.ey.com/take-enterprise-cost-reduction-strategy-alienating-engaging/


February 5, 2019

IMA Releases Enhanced Management Accounting Competency Framework for Professionals in the Digital Age


IMA® (Institute of Management Accountants) has released its enhanced Management Accounting Competency Framework. The updated Framework reflects the skills management accountants will need to remain relevant and be future-ready.
https://www.imanet.org/about-ima/news-and-media-relations/press-releases/2019/2/5/ima-releases-enhanced-management-accounting-competency-framework?ssopc=1

IMA Management Accounting Competency Framework 


Strategy, Planning & Performance
The competencies required to envision the future, lead the strategic planning process, guide decisions, manage risk, and monitor performance.

Reporting & Control
The competencies required to measure and report an organization’s performance in compliance with relevant standards and regulations.

Technology & Analytics
The competencies required to manage technology and analyze data to enhance organizational success.

Business Acumen & Operations
The competencies required to contribute as a cross-functional business partner to transform company-wide operations.

Leadership
The competencies required to collaborate with others and inspire teams to achieve organizational goals.

Professional Ethics & Values
The competencies required to demonstrate the professional values, ethical behavior, and legal compliance essential to a sustainable business model.
Download full framework from https://www.imanet.org/career-resources/management-accounting-competencies?ssopc=1

2018

Strategic Cost Transformation

by Dr. Reginald Tomas Lee
Publisher: Business Expert Press
Release Date: December 2018
https://www.oreilly.com/library/view/strategic-cost-transformation/9781631578809/

Virtual Issue on Empirical Management Accounting Research

Journal of Accounting Research, August 2018
Margaret A. Abernethy
University of Melbourne, Department of Accounting
Dennis Campbell
Harvard University - Accounting & Control Unit

Review of empirical papers published in JAR over the past 10 years examining management accounting and control systems in organizational contexts that are complex, ambiguous and where performance is difficult to measure. These papers use a variety of newer economic models of organization culture, relational contracts and related theories from sociology and psychology to provide a direction to management accounting.

2015

Cost Transformation Model of CGMA

http://www.cgma.org/Resources/Tools/pages/cost-transformation-model.aspx

Cost Transformation - Tata Steel Europe Case Study

http://www.cgma.org/Resources/Tools/Documents/Cost_Transformation_COL_TATA.PDF


2014

May 2014
Corporate and Integrated Reporting
HBS working paper
http://hbswk.hbs.edu/item/7502.html


Jan 2014
Environmental Accounting - ACCA
http://www.accaglobal.com/zw/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f5/technical-articles/Env-MA.html


2009

How to Cut Cost Strategically

Harvard Business Review
Published on 22 Sep 2009
Cesare Mainardi, managing director of Booz & Company, details how executives should cut costs--but often dont.
______________

______________


1997

Effective Management of Future Costs through New Product Target Costing

Effective cost management must start at the design stage. As much as 90-95% of a product's costs are added in the design process. That is why effective cost management programs focus on design and manufacturing. The primary cost management method to control cost during design is a combination of target costing and value engineering.
Target Costing and Value Engineering - Robin Cooper - 1997
https://nraoiekc.blogspot.com/2019/07/target-costing-and-value-engineering.html
Value Analysis and Engineering - Online Book



Financial, Cost and Management Accounting - Review Notes List




Updated on 28 July 2019,  29 May 2019,  10 December 2015













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May 22, 2019

Financial, Cost and Management Accounting - Review Notes List


 
                                   Narayana Rao K.V.S.S. on Cover Page of Business Today 
October 22 - November 6, 1997




Financial Accounting - Horngren - Review Notes List

Introduction to Financial Accounting - Google Books Link

Links to review notes and power point presentations accompanying the book are available as follows:

1. Accounting: The Language of Business

2. Measuring Income to Assess Performance

3. Recording Transactions

4. Accrual Accounting and Financial Statements

5. Statement of Cash Flows

6. Accounting for Sales

7. Inventories and Cost of Goods Sold

8. Long-Lived Assets and Depreciation

9. Liabilities and Interest

10. Stockholder's Equity

11. Intercorporate Investments and Consolidations

12. Financial Statement Analysis

Cost Accounting
1. Role of Costing and Cost Accounting in the Organization
2. Introduction to Cost Terms - Review Notes
3. Traditional Cost Objectives and Their Utility
4. Job Costing - Review Notes

Variance Analysis, Flexible Budget and Management Control



Management Accounting

1. Managerial Accounting or Management Accounting - Role in Business and Industrial Organizations



MBA Knowledge Revision Schedule


January  - February  - March  - April  - May   -   June

July       - August     - September  - October - November  - December


Updated 6 August 2017, 27 June 2014
Posted by at 8:12 PM 16 comments
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May 13, 2019

Activity-Based Costing and Activity-Based Budgeting Review Notes


Narayana Rao K.V.S.S. on Cover Page of Business Today 
October 22 - November 6, 1997




In traditional costing, direct material, direct labor and direct expenses are identified with the jobs and all other expenses are accumulated under the head “overheads” and are charged to the jobs on the basis of one or two measurements such as direct labor cost or direct material cost of the jobs.


Proponents of activity based costing first brought out the fact that product costs derived by using traditional costing techniques are giving wrong information. The actual product cost of certain jobs is high but traditional costing system is reporting a low cost for them. If the selling price is determined on the basis of such wrong low cost, at the end of the year, companies find that they have not earned the anticipated profits.

In activity based costing, all the costs which are classified as overheads in traditional costing system are accumulated under various activities which are carried out in the organization. From the activity cost for a period, and the number of times the activity is carried out in the period, cost for doing the activity once is ascertained. Then an account is maintained each time the activity is carried and the job responsible for performing the activity is recorded. Therefore the activity cost can be charged to the job.

Thus the job cost, now comprises of direct material cost, direct labor costs, direct expenses and costs of each of the activities consumed by the job.

Activity based costing provides a more realistic estimate of costs of products.

Normally compared to traditional costing system, ABC system provides lower cost figures for standard products and higher cost figures for nonstandard orders.


The logic of ABC systems is that more finely structured activity-cost pools with activity-specific cost-allocation bases, which are cost drivers for the cost pool, lead to more accurate cost-allocation systems


Hierarchy of Cost Pools


ABC systems commonly use a four-part cost hierarchy or hierarchy of cost pools - output unit-level costs, batch-level costs, product-sustaining costs, and facility sustaining costs - to identify cost-allocation bases that are preferably cost drivers of costs in activity cost pools.


Implementing Activity-Based Costing



1. Identify the chosen cost objects

2. Identify the direct costs of the products

3. Select the cost-allocation bases to use for allocating indirect costs

4. Identify the indirect costs associated with each cost-allocation base

5. Compute the rate per unit of each cost-allocation base used to allocate indirect costs to the products

6. Compute the indirect costs allocated to the products

7. Compute the total costs of the products by adding all direct and indirect costs assigned to them.


Use of ABC Systems

Pricing and Product-mix decisions

Cost Reduction and Process Improvement Decisions

Design Decisions

Planning and Managing Activities



Adoption of ABC systems


2005 - 22% of 215 respondents indicated that their organization had implemented ABC

Narcyz Roztocki, Sally M. Schultz, Adoption and Implementation of Activity-Based Costing: A Web Based Survey
Prof Roztocki now with State University of New York at New Paltz Business School is a Phd in Industrial Engineering from University of Pittsburgh.


Based on

Horngren et al. Cost Accounting 

Chapter 5. Activity Based Costing and Activity-Based Management, 10th Edition

Cost Accounting - Horngren et al., Book Information and Review


Originally posted in
http://knol.google.com/k/narayana-rao/activity-based-costing-abc/2utb2lsm2k7a/ 12


Updated on 14 May 2019, 8 December 2011
Posted by at 4:28 PM 2 comments
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May 2, 2019

Costing and Cost Statements for Strategic Profitability Analysis


Strategic management accounting is a recently developed branch in management accounting. It helps management in developing required estimates for various proposed strategies based on accounting information. The main job of management accountant is to provide accounting statements that have the relevant information of use in developing estimates of the results.

Company can pursue cost leadership strategy or  differentiation strategy in the product and target markets it is operating. The accounts of two years can be compared and the growth, product differentiation and cost leadership components of the increase in operating income can be determined.

Growth component

The growth component measures change in revenue and costs based on changes in units sold or produced, with all other variables being the same as the previous year. By isolating the change in units, the analysis looks at the impact of the change in growth on revenue.


Revenue effect of growth


Revenue effect of
growth component = (Actual units of output sold in the current period – Actual units of output
sold in the last period) × Selling price in the last period.

Maintaining the selling price of the last period isolates the increase in revenue resulting from the change in units sold.

Cost effect of growth

Cost effect of growth component  = (Actual units of input or capacity that would have
used to produce current period output assuming the same input-output relationship that existed in the last period  – Actual units of input or capacity to produce the last period output)  × Input prices
in the last period


Maintaining the input-output relationship in the last period input prices isolates the increase in cost resulting from the growth in sales between the last period and the current period. Since fixed costs do not change, variable direct-material costs are isolated from fixed costs (including conversion and R&D costs). This approach assumes that the company is still operating within its relevant range.


Price-recovery component

The price-recovery component of operating income measures the change in revenues and the change in costs to produce the given level of current output resulting from the change, assuming the relationship of input output remains constant. This isolates the change in revenue due solely to the change in selling price.

Revenue effect of price recovery

Revenue effect of product
differentiation component = (Selling price in the current period – Selling price in the last period) ×
Actual units of output sold in the current period

Cost effect of price recovery

This component focuses on the effect of changes in prices of input and also incorporates changes in fixed costs or conversion costs.
Cost effect of  product differentiation component
 = (Input prices in the current period  – Input prices in the last period)  ×
(Actual units of inputs or capacity that would have been used to produce in the current period output
assuming the same input-output relationship that existed in the last period)

Productivity component

The productivity component analysis uses current-year prices to isolate the change in costs between the current and past year caused solely by the changes in quantities, mix, and capacity of inputs.

Productivity/cost leadership component =
(Actual units of input or capacity to produce the current period input
 – Actual units of inputs or capacity that would have been used to produce the current period output assuming the same input-output relationship that existed in the last period)
 × (Current period prices)

Conclusion
Companies that have chosen a cost-leadership strategy would be more likely to focus on productivity and growth components, while companies following a differentiation strategy would see more changes in price recovery and growth components.


Strategic Analysis of Operating Income - Part 1
____________________

____________________
Startup Tech Asia

Strategic Analysis of Operating Income - Part 2
____________________


____________________
Startup Tech Asia



Cost Information for Zero-Based Productivity Management of Supply Chain - McKinsey Way Supply Chain Industrial Engineering

https://nraomtr.blogspot.com/2019/04/zero-based-productivity-management-of.html

McKinsey consultants recommend start by breaking costs into four crucial categories—direct labor (including equipment), indirect labor (including equipment), warehouse and logistics, and materials  (including conversion yields)—and building  a bottom-up view on the existing cost base. The category which may have the highest opportunity  varies by industry and type of manufacturing. In more automated settings or continuous manufacturing, equipment category may have higher opportunity. Direct-labor may be more important in  manual assembly to find savings opportunities.

Establishing granular transparency


Companies have to  seek  granularity into costs. This  visibility of lower and lower level costs, gained by aggregating ledger account data from internal sources and benchmarking data from external sources, enables organizations to establish relevant benchmarks across spending categories. Data is collected from existing recorded data  and is augmented by specially made cost studies using  observations and targeted sampling where data is lacking. The  data has to point out  regulatory and customer special requirements, which act as constraints in the problem. 


Updated 2 May 2019,   2 May 2016, 8 Dec 2011
Posted by at 4:24 PM 0 comments
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Costing for Spoilage, Rework and Scrap

The key objectives in accounting for spoilage are determining the magnitude of the costs of spoilage and distinguishing between the costs of normal and abnormal spoilage.


Reducing spoilage, rework, and scrap are important for reducing cost and they are part of production process quality improvement effort.

Concepts used in developing the theory of the topic

Spoilage: Spoilage is unacceptable units of production that are discarded or are sold for reduced prices. Spoilage can occur at any stage of the production process.

Rework: Rework is unacceptable units of production that are  subsequently repaired and sold as acceptable finished goods.

Scrap: Scrap is material left over when making a product. It has low sales value when compared with the sales value of the product or sales of value of the input material.

Cost accounting practice recommends normal spoilage is specified as part of production process specification. Its quantum can be evaluated or analyzed at various points of time it can be reduced further if possible by improving the process or technology. In routine accounting abnormal spoilage is reported to managers above the shop floor personnel.

Abnormal Spoilage: The spoilage that should not arise under efficient operating conditions.


Accounting for Spoilage in Job Costing.


Normal Spoilage

The cost of normal spoilage is added to the cost of the product so that estimate cost of product includes allowance for normal cost for subsequent cost estimations.

The disposal value of the spoilage is credited to work-in-progress control account and also to the specific job account. The materials control account and spoiled goods disposal value or income account are debited with the disposal value.

The effect will be that in specific job, it will be charged for all the expenses incurred for the job, but only good units are shown as output. The units which became spoilage are not included in the output and the disposal value of these units is deducted from the total expense. So the cost incurred due to the spoilage is included in the total cost and when one calculates the unit cost of the finished item, it includes a charge for the normal spoilage.

Abnormal Spoilage

In the case of abnormal spoilage, the total cost of the spoilage is removed from the specific job account by giving a credit to it and it is debited to  loss from abnormal spoilage account.

Journal entries

Spoiled good disposal value or income account    Debit
Loss from abnormal spoilage account                   Debit

Specific Job Account                                             Credit

Thus the company management and executives are made aware of abnormal losses so that actions are initiated to prevent them in the future. Accounting and reporting have the purpose of making managers aware of the need to act to prevent undesirable events.


Accounting for Rework in Job Costing


Rework is done on finished products or components, that did not meet specifications and after rework they become acceptable finished goods of components.  There can be an estimated or accepted as normal rework. Any rework above this normal rework is abnormal rework.

Normal Rework

The rework cost is charged to the specific job. Rework may involve some material use, labor use and also incurring of overhead cost. Hence the entry is

WIP account of a specific job    Debit

Material control A/C                                       Credit
Wages Payable A/C                                         Credit
Manufacturing Overhead Allocated A/C        Credit


Abnormal Rework

Abnormal rework is not charged to job so that it will not appear future estimates for similar jobs. It is recorded in a separate loss account.

Loss from Abnormal Rework A/C     Debit

Material control A/C                                   Credit
Wages Payable A/C                                    Credit
Manufacturing Overhead Allocated A/C   Credit

Accounting for Scrap


When the dollar amount of the scrap is immaterial

When the dollar amount of the scrap is insignificant, scrap is returned to the store or scrap store with documentary proof. Periodically, the scrap is sold and income is recorded as income from scrap. If it is material, then the income can be credited to the overhead account and thus overhead cost will become less to that extent.

When the dollar amount is substantial at Job Level

If the dollar amount of the scrap is substantial at the job level, then the scrap generated in the job is measured immediately, returned to the store and its value is ascertained based on the estimates sale value of the scrap. Then the entry for the return of scrap to stores will be:

Material Control A/C  Debit

Work in Process A/C role of the Job  Credit


Thus the cost accounting system helps in highlighting the abnormal costs of spoilage and rework so that remedial action is taken by the managers concerned. Also it provides the cost of the products manufactured by a firm as a true representation of the costs incurred by the firm and it helps the company to provide proper cost estimates for the future and price quotations based on these cost estimates.



Updated  3 May 2017,  6 May 2015
First published  8 Dec 2011
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Cost Information and Analysis for Capital Budgeting



Cash estimates are to be done for studying the economic feasibility of the projects by project designer or developers. To estimate future cash expenditures, project persons have to take the help of the information recorded in cost accounting ledgers and supporting documents.

__________________


__________________
Jane the Accountant


To extend the past data, to current times, the project managers may go to market and get current quotations for various items involved. They can also use indices for inflation to make internal estimates of the possible current costs.

Updated on 4 May 2019, 2 May 2016
Posted by at 4:20 PM 0 comments
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