2/4/2015

Prepared by
Ms. Dao Nam Giang
Associate Dean of Accounting and Auditing Faculty
(namgiangriver@gmail.com).

OVERVIEW
Class rules
Team learning approach/group - based instructional

format
Assessment
Course materials
Course objects
Learning outcomes
Studying progress

Class rules
Please be on time. (an acceptable margin of 5 minutes)
Kindly turn off all cell phones during the lecture.
Attendance is important and will be taken in different ways.
Class interaction: be prepared for your lessons and actively

participate in the lecture.

Questions and comment box
Basis of respect:
Stay and interact with others silently. Once the lecture starts, You

are not allowed to leave the lecture room and do other tasks.
Share freely with others your thoughts and feelings in a friendly

or cordial manner. You may raise your hands to signify your

intention to give an opinion in case somebody is still talking.
Lets give due courtesy to those who are speaking.

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Team leaning approach

Study group: 3 to 5 students; leader; exchange

information and keep contacted.

Study group will be maintained during the semester

and will assigned different tasks every one or two

weeks.
Pre lecture quizzes

Assessment
2 assignments:
First assignment: be submitted week 9 - Individual
assignment + oral exams and progress tests
Second assignment: be submitted week 16 - Individual
assignment + oral exams and progress tests
Short progress tests during the course:
Focus on 1 or 2 learning outcomes
The result will be used as a substitute for the oral
examinations (done correctly 70% or more of each test > not be questioned on the related outcomes in the oral
exam)

Course materials
Text book
Handouts and exercises (will be send to your class

email)
Incomplete notes so you are required to print out and

bring the handout with you to the class.

Other reading introduced in each chapter

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Course objectives
Accounting: provide information about economic

activities of one organization to interested users

Financial Accounting vs Management accounting

Definition of Management Accounting

A field of accounting that provides economic and financial
information for managers and other internal users.
Also called Managerial Accounting

Course objectives
Provide learners with the understanding and ability to

use cost information for budgeting and forecasting

purposes in the management of business:
How cost data is collected, compiled and analysed, and

processed into useful information.

Deal with budgetary planning and control; how to

prepare forecasts and budgets and to compare these to

actual business results
Consider different costing and budgetary systems and
the causes of resulting variances, possible implications
and corrective action.

Learning outcomes
1. Be able to analyze cost information within a business:
1.1. Classify different types of cost
1.2. Using different costing methods
1.3. Calculate costs using appropriate techniques
1.4. Analyse cost data using appropriate techniques

2. Be able to propose methods to reduce costs and

enhance value within a business:
2.1. Prepare and analyze routine cost report
2.2 Use performance indicators to identify potential improvements
2.3. Suggest improvements to reduce cost, enhance value and
quality

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Learning outcomes
3. Be able to prepare forecasts and budgets for a business:
3.1. Explain the purpose and nature of the budgeting process
3.2. Select appropriate budgeting methods for the organization
and its needs.
3.3. Prepare budgets according to the chosen budgeting method.
3.4. Prepare a cash budget

4. Be able to Monitor performance against budgets within

a business:
4.1. Calculate variances, identify possible causes and recommend
corrective actions
4.2. Prepare an operating statement reconciling budgeted and
actual results.
4.3. Report findings to management in accordance with identified
responsibility centers

STYDYING PROGRESS

Week

Content

Chapter 1: Cost accounting, classification and behavior

Chapter 2: Material and labor cost

Chapter 3: Overhead apportionment and absorption

Chapter 4: Marginal and absorption costing

Chapter 6: Costing system

Chapter 7: Process costing (I)

Chapter 5: Price, value and quality and checking draft

Chapter Review and checking draft

Submit assignment 1 and oral examination

10

Chapter 7: Process costing (II)

11

Chapter 8: Budgeting

12

Chapter 8: Budgeting

13

Chapter 9: Standard costing and variance analysis

14

Chapter 10: Responsibility accounting

15

Review and checking draft

Warm up activity
How does the course related to other subjects that you

have studied?
Discuss to form your study group

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Managing financial
resources and decisions
Management
accounting
Financial reporting

Review on MFRS
Chapter 1- 3: different assets and liabilities

(sources of finances) of a business

Chapter 5: Basis procedures in accounting
Chapter 7: Cost terms and cost classification
Chapter 4: Stocks and cash
Chapter 9: Pricing decisions
Chapter 6: Evaluating financial performance
Chapter 8: Budgets

Activity 1
Review of basis terms in accounting

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Content
Cost concepts
Direct cost vs indirect cost
Cost behavior
Cost estimation
Manufacturing activity and manufacturing costs
Prepare income statement for manufacturer
Costs classification for decision making/differential

cost analysis

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Cost concepts
Cost sacrificed resource to achieve a specific

objective
Cost accounting: measure and reports financial and

non financial information relating to the cost of

acquiring or utilizing resources in an organization.
Cost accounting provide information to assist:
Establishing stock valuation, profit and balance sheet

items
Planning
Control
Decision making

Cost concepts
Cost unit: a unit of product or service to which costs can be

related. The cost unit is the basic control unit for costing
purposes. Can you give some examples?
Cost centre /cost pool: a location, or a function, or an
activity or an item of equipment. Each cost centre act as a
collecting place for certain cost before they are analyzed
further.
In production department: the department itself, a machine or

group of machines in the department, a foremans group, a

workbench..
Production service or back-up departments (maintenance,
store,)
Administration, sales or distribution departments (personnel,
accounting, purchasing
Cost centre of shared costs for directly allocated (rent, rates,
heating, lighting..)

Cost concepts - example

Chocolate cakes production:
Cost unit: Box of chocolate cake
Cost centers
Mixing department
Baking department
Stores department

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Cost concepts
Cost centers 1

cost

Cost unit
1

Cost centers 2
Cost centers 3

Cost unit
2

Direct costs vs. Indirect costs

Direct Costs:
Costs that can be easily and conveniently traced in full to
the product, service or department that is being costed.
Example: Parts, Assembly line wages
Indirect Costs
Costs that is incurred in the course of making a product,
providing a service or running a department, but cannot
be traced directly and in full to the product, service or
department. Ex: Electricity, Rent,..
Instead of being traced, these costs are allocated to a
cost object in a rational and systematic manner

Hanoi, 11-16 December 2005

24

Direct and indirect cost - examples

SHOP

RESTAURANT

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Cost Behavior
Cost behavior: the variability of input costs with
activity undertaken.
Level of activity: amount of work done or the
number of events occurred.
The volume of production in a period
The number of item sold
The value of items sold
The number of invoices issued
.

Cost Behavior
Behavior of Cost (within the relevant range)
Cost

In Total

Per Unit

Variable

Total variable cost changes

as activity level changes.

Variable cost per unit remains

the same over wide ranges
of activity.

Fixed

Total fixed cost remains

the same even when the
activity level changes.

Average fixed cost per unit goes

down as activity level goes up.

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Step Costs
A step cost is a cost which is fixed in nature but
only within certain levels of activity:

Cost

- Rent, depreciation, maintenance,

Volume

Mixed Costs /semi-variable costs

Total telephone bill

A mixed cost has both fixed and variable

components. Consider your telephone costs.
Y

Variable
Cost per minutes talked

Activity (minutes talked)

Fixed Monthly
Charge

Mixed Costs /semi-variable costs

The total mixed cost line can be expressed
as an equation: Y = a + bX

Total telephone bill

Where:

Y = the total mixed cost

a = the total fixed cost (the
vertical intercept of the line)
b = the variable cost per unit of
activity (the slope of the line)
X = the level of activity

Variable
Cost per minutes talked

Activity (minutes talked)

Fixed Monthly
Charge

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Activity 3
Are the following likely to be fixed, variable or mixed

cost?
Telephone bill
Annual salary of the chief accountant
The management accountants annual membership fee

to his professional body (paid by the company)

Cost of materials used to pack 20 units of product X into

a box

The Scattergraph Method

Plot the data points on a graph (total
cost vs. activity).

Maintenance Cost
1,000s of Dollars

Y
20

* *
* *

10

* ** *
**

Patient-days in 1,000s

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The Scattergraph Method Draw a line

through the
data points
with about
an equal
number of
points above
and below
the line.

Maintenance Cost
1,000s of Dollars

Y
20

* *
* *

10

* ** *
**

Patient-days in 1,000s

The Scattergraph Method

Maintenance Cost
1,000s of Dollars

Y Total maintenance cost = $11,000

20

* *
* *

10

* ** *
**

Intercept = Fixed cost: $10,000

Use one
data point
to estimate
the total
level of
activity
and the
total cost.

Patient-days in 1,000s
Patient days = 800

The Scattergraph Method

Make a quick estimate of variable cost per
unit and determine the cost equation.
Total maintenance at 800 patients
Less: Fixed cost
Estimated total variable cost for 800 patients

Variable cost per unit =

$1,000
800

$ 11,000
10,000
$ 1,000

= $1.25/patient
$1.25/patient--day

Y = $10,000 + $1.25X
Total maintenance cost

Number of patient days

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The High-Low Method

Assume the following hours of maintenance work
and the total maintenance costs for six months.

The High-Low Method

The variable cost per
hour of maintenance
is equal to the
change in cost
divided by the
change in hours.
High
Low
Change

Hours Total Cost

800 $ 9,800
500
7,400
300 $ 2,400

The High-Low Method

Total Fixed Cost = Total Cost Total Variable Cost

Total Fixed Cost =
Total Fixed Cost =
Total Fixed Cost =

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The High-Low Method

The Cost Equation for Maintenance

Y = $3,400 + $8.00X
$8.00X

Quick Check
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000 units
are sold. Using the high-low method, what is the
variable portion of sales salaries and commission?
a. $0.08 per unit
b. $0.10 per unit
c. $0.12 per unit
d. $0.125 per unit

Quick Check
Sales salaries and commissions are $10,000 when
80,000 units are sold, and $14,000 when 120,000
units are sold. Using the high-low method, what is
the fixed portion of sales salaries and commissions?
a. $ 2,000
b. $ 4,000
c. $10,000
d. $12,000

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Manufacturing activity
Manufacturing cost

Comparing Merchandising and

Manufacturing Activities
Merchandisers . . .
Buy finished goods.
Sell finished goods.

Manufacturers . . .
Buy raw materials.
Produce and sell
finished goods.

MegaLoMart

Inventories of a Manufacturing Business

Raw materials - inventory on hand

and available for use.

Finished goodscompleted
goods awaiting
sale.

Work in process partially

completed
goods.

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Manufacturing activity
Manufacturing consists of activities and processes to
convert raw materials into finished goods.
Manufacturing costs: are the cost to produce a unit
of product and typically classified as:
Direct
Labor

Direct
Materials

Manufacturing
Overhead

The Product

Direct Materials
Raw materials that become an integral part of the product

(unless used in negligible amounts and/or having negligible cost)

Component parts or other materials specially purchased for a

particular job, order or process.

Part-finished work transferred from previous process
Primary packing material (cartons and boxes)

Example: What are direct materials in

producinged a car?

Direct wages
Wages paid for labour (either as basic hours

or as overtime) expended on work on the

product itself.

Example: Wages paid to automobile assembly workers

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Direct wages activity 1

Classify the following labour costs as either direct or

indirect
The basic pay of direct workers (cash paid, tax or other

deductions)
The basic pay of indirect workers
Overtime premium (the premium over basic pay for

working overtime)
Bonus payments under a group bonus payments scheme
Employers National Insurance contributions
Idle time of direct workers.
Work on installation of equipment

Direct expenses
Expenses are incurred on a specific product other than

direct material cost and direct wages

Example:
The cost of special designs, drawings or layouts
The hire of tools or equipments or a particular job
Maintenance cost of tools fixtures

Production/Manufacturing Overhead
Manufacturing costs cannot be traced directly to
specific units produced.
Indirect materials:
Materials used to support the production process.
Examples: Lubricants and cleaning supplies used in the
automobile assembly plant.

Indirect
labor:
Wages paid to employees who are not directly involved in
production work.
Examples: Maintenance workers, janitors and security guards.

Indirect
expenses:
Rent, rate, Insurance of a factory
Depreciation, fuel, power, repairs and maintenance of plant,
machinery and factory buildings, .

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Flow of Physical Goods in Production

Direct
Materials
Purchased

Direct
Materials
Used

Finished
Goods

Manufacturing
Overhead

Direct
Labor

Goods Sold
MegaLoMart

Nonmanufacturing Costs
Selling
Costs/overhead

Costs necessary to get

the order and deliver
the product.

Administrative
Costs/overhead

All executive,
organizational, and
clerical costs associated
with the general
management of an
organization..

Product Costs Versus Period Costs

Product costs include
direct materials, direct
labor, and
manufacturing
overhead.
Cost of
Goods Sold

Inventory

Period costs are not

included in product
costs. They are
expensed on the
income statement.
Expense

Sale

Balance
Sheet

Income
Statement

Income
Statement

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Quick Check
Which of the following costs would be
considered a period rather than a product cost
in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.

Prime Cost and Conversion Cost

Manufacturing costs are often
classified as follows:
Direct
Material

Direct
Labor

Prime
Cost

Manufacturing
Overhead

Conversion
Cost

Exercise
The Sloane Company specializes in producing a set of

wood patio furniture consisting of a table and four

chairs. Cost data for the year 2012 as follow:
For each item, determine it is period cost or product
cost; direct cost or indirect cost: FIXED OR VARIABLE
COST

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Factory labor, direct

Advertising
Factory supervision
Property taxes, factory building
Sales commissions
Insurance, factory
Depreciation, office equipment
Lease cost, factory equipment
Indirect materials, factory
Depreciation, factory building
General office supplies (billing)
General office salaries
Direct materials used (wood, bolts, etc.)
Utilities, factory

$150,000
$32,500
$28,000
$2,000
$97,000
$6,500
$5,000
$19,000
$10,000
$20,500
$3,500
$73,000
$120,000
$16,000

Income statement
Report revenues and expenses => net profit/net loss

Revenue
- Cost of sales (cost of goods sold)
Gross profit
- Selling expenses
- Administrative expenses
Net income
Issue: how to calculate cost of goods sold?

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Inventory Flows
Beginning
balance

Additions
to inventory

Ending
balance

Withdrawals
from
inventory

Manufacturing Company
Cost of goods sold:
Beg. Finished goods inv.
+ Cost of goods manufactured
Goods available for sale
- Ending finished goods inventory
= Cost of goods sold

14,200
234,150
$ 248,350
(12,100)
$ 236,250

Schedule of Cost of Goods Manufactured

Calculates the cost of raw
material, direct labor and
manufacturing overhead used
in production.

Calculates the manufacturing

costs associated with goods
that were finished during the
period.

Schedule of Cost of Goods Manufactured

Raw Materials

+
=

Beginning raw
materials inventory
Raw materials
purchased
Raw materials
available for use
in production
Ending raw materials
inventory
Raw materials used
in production

Manufacturing
As
items are removed Work
from raw
Costs
In Process
materials inventory and placed
into the production process,
they are called direct
materials.

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Schedule of Cost of Goods Manufactured

Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
Ending raw materials
inventory
= Raw materials used
in production

Manufacturing
Costs

Work
Conversion
In Process
costs
are costs
incurred to
convert the
direct material
into a finished
product.

Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

As items are removed from raw

materials inventory and placed into
the production process, they are
called direct materials.

Schedule of Cost of Goods Manufactured

Raw Materials
Beginning raw
materials inventory
+ Raw materials
purchased
= Raw materials
available for use
in production
Ending raw materials
inventory
= Raw materials used
in production

Manufacturing
Costs

Work
In Process

Direct materials
+ Direct labor
+ Mfg. overhead
= Total manufacturing
costs

Beginning work in
process inventory
+ Total manufacturing
costs
= Total work in
process for the
period
Ending work in
All manufacturing costs
incurred
process inventory
during the period are
added
to the
= Cost
of goods
manufactured.
beginning balance of work
in process.

Schedule of Cost of Goods Manufactured

Raw Materials

Manufacturing
Costs

Beginning raw
Direct materials
materials inventory
+ Direct labor
+ Raw materials
+ Mfg. overhead
purchased
= Total manufacturing
= Raw materials
costs
available for use
in production
Ending raw materials
inventory
Costs
associated with the goods that
= Raw materials used
areincompleted
during the period are
production

transferred to finished goods

inventory.

Work
In Process

+
=

Beginning work in
process inventory
Total manufacturing
costs
Total work in
process for the
period
Ending work in
process inventory
Cost of goods
manufactured.

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Cost of Goods Sold

Work
In Process

Finished Goods

Beginning work in
process inventory
+ Manufacturing costs
for the period
= Total work in process
for the period
Ending work in
process inventory
= Cost of goods
manufactured

Beginning finished
goods inventory
+ Cost of goods
manufactured
= Cost of goods
available for sale
- Ending finished
goods inventory
Cost of goods
sold

Manufacturing Cost Flows

Costs

Balance Sheet
Inventories

Material Purchases

Raw Materials

Direct Labor

Work in
Process

Manufacturing
Overhead

Selling and
Administrative

Finished
Goods

Period Costs

Income
Statement
Expenses

Cost of
Goods
Sold
Selling and
Administrative

Quick Check
Beginning raw materials inventory was $32,000.
During the month, $276,000 of raw material was
purchased. A count at the end of the month
revealed that $28,000 of raw material was still
present. What is the cost of direct material
used?
A.
$276,000
B.
$272,000
C.
$280,000
D.
$ 2,000

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Quick Check
Direct materials used in production totaled
$280,000. Direct labor was $375,000 and factory
overhead was $180,000. What were total
manufacturing costs incurred for the month?
A.
$555,000
B.
$835,000
C.
$655,000
D.
Cannot be determined.

Quick Check
Beginning work in process was $125,000.
Manufacturing costs incurred for the month
were $835,000. There were $200,000 of
partially finished goods remaining in work in
process inventory at the end of the month.
What was the cost of goods manufactured
during the month?
A.
$1,160,000
B.
$ 910,000
C.
$ 760,000
D.
Cannot be determined.

Quick Check
Beginning finished goods inventory was
$130,000. The cost of goods manufactured for the
month was $760,000. The ending finished goods
inventory was $150,000. What was the cost of
goods sold for the month?
A. $ 20,000.
B. $740,000.
C. $780,000.
D. $760,000.

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Production cost/Product cost

FINISHED GOODS

Cost of good sold

Period Cost

Cost and decision making

Fixed and variable cost
Relevant and non - relevant cost
Cost-benefit analysis/Differential analysis

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Relevant cost
Relevant cost is a future cashflow arising as a direct

consequence of a decision:
Future cost: cost incurred (paid or not yet paid) is

irrelevant.
Cashflows:
Arises as a direct consequence of a decision: costs

differ under some or all the alternatives/available

opportunities incremental cost/differential costs
Some times expressed as opportunity cost the
benefit foregone by choosing one opportunity instead of
the next best alternative.

Non relevant cost

Sunk costs: cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions. (Paid)
Committed costs: future cash outflow that will
be incurred anyway, whatever decision is taken
now about alternative opportunities.
Notional costs/Imputed cost: no actual cash
expense incurred
Notional rent charged to the branch for the use of the

buildings owned by the company.

Notional interest charges on capital used by the

branch,..

Example 1
JamCo currently sells 100,000 units of its
product. The company has revenue and costs
as shown below:
Sales
Direct materials
Direct labor
Factory overhead
Selling expenses
Administrative expenses
Total expenses
Operating income

Per Unit
$ 10.00
3.50
2.20
1.10
1.40
0.80
$
9.00
$
1.00

$
$

Total
1,000,000
350,000
220,000
110,000
140,000
80,000
900,000
100,000

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Special Order Decisions

JamCo is approached by an overseas
company that offers to purchase
10,000 units at $8.50 per unit.

If JamCo accepts the offer, total factory

overhead will increase by $5,000; total selling
expenses will increase by $2,000; and total
administrative expenses will increase
by $1,000.
Should JamCo
accept the offer?

Example 2
OserCo has 10,000 defective units that
cost $1.00 each to make. The units can be
scrapped now for $.40 each or rebuilt at an
additional cost of $.80 per unit.
If rebuilt, the units can be sold for the normal
selling price of $1.50 each. Rebuilding the 10,000
defective units will prevent the production of
10,000 new units that would also sell for $1.50.

Should OserCo scrap or rebuild?

Summary of the Types of Cost Classifications

Financial
Reporting

Predicting
Cost
Behavior

Assigning
Costs to Cost
Objects

Decision
Making

27