Accounting

for Engineers

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 Virtual Trading Report
 Extra credit – a few more points for you 
 Things to highlight:
 Your trading strategy
- The companies you traded and basic financial information
about them, How did you choose them, Why did you choose
them, valuation criteria employed.

 Your performance
- Track your trading: stocks bought and sold and your thinking
behind trading decisions made.

 Retrospection: financial trading decisions you could

have made differently and their effect on your
performance.
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 Reporting Financial Information

 Financial Accounting: reports financial data

to the “Outsiders”

 Cost Accounting: internally tracks minute

details of financial operations

 Managerial Accounting: reports summarized

cost accounting data to “Management”

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 Recap: Financial Accounting – Financial Statements
Financial statements are a snapshot of a firm’s activities for a specific period
of time. Financial Statements are how a firm is “valued” to the public.
 Balance Sheet – The Accounting Equation
 Is a summary of firm’s assets, liabilities, and shareholder equity.
 Equation: Assets = Liabilities + Shareholder’s (owner’s) equity

 Income Statement
 Presents the results of operating activities of a firm.
 Equation: Revenues – Expense = Net Income (profit)

 Cash Flow Statement

 Shows the net cash flow related to the firm’s operating, investing and financing activities. Equation:
Cash In – Cash Out = Net Cash ( Increase or (Decrease) )

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 COST ACCOUNTING
Accounting For Transactions
 Accounts are the building blocks
 Specially labeled “buckets”

 The Chart of Accounts list all accounts

 This is a guide or map to the system

 The Ledger tracks all entries

 This is the “set of books” of accounting

 A simple account format is the

 T-Account
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Chart of Accounts
It’s common to have hundreds of “accounts”
 Assets
 Cost of Goods Sold
 Balance Sheet lines
 Income Statement
 Cash, Inventory . . .
 Touch labor, material
 Liabilities
 Operating Expenses
 Balance Sheet
 Income Statement
 Taxes owed, trade
 Rent, telephone,
payables
depreciation
 Equity
 Other Income
 Balance Sheet
 Income Statement
 Current Earnings
 Interest earned
 Revenue
 Other Expenses
 Income Statement
 Income Statement
 Sales
 Fines, flood losses

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 Making Account Entries
 Increases in Assets are recorded on the left (debit) side,
decreases on the right (credit).

 Increases in Liabilities and Owners Equity are recorded on

the right (credit) side.

 Cost accounting (like financial accounting) is a “double

entry” system -- for every transaction there are two (or
more) account entries -- the balance sheet stays in balance.

 Whenever you credit one account, you need to debit one as

well.

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T-Account debits and credits

 A simple account format is the

“T-Account”
ACCOUNT NAME

Left Side Right Side See, it’s “T” shaped

Debit Credit

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 Example: Start Company with Shs10m
cash

 Assets = Liabilities + Owner’s Equity

Cash + Land = Account Payable + Equity

Capital:10,000,000 Capital:10,000,000

Balances
Shs10,000,000 = $10,000,000
 Example: Purchase Land for Shs4,000,000
(Shs2,000,000 Cash, Shs2,000,000 Loan)
 Assets = Liabilities + Owner’s Equity

Cash Land
Cash: 2,000,000
Capital: 10,000,000 Land: 2,000,000
Loan: 2,000,000 Equity
Capital: 10,000,000

Loan/Account Payable
Land: 2,000,000
 Example: Transaction 2: Pay Shs. 1m on
land debt
 Assets = Liabilities + Owner’s Equity

Cash Land
Cash: 2,000,000
Capital: 10,000,000 Land: 2,000,000
Loan: 2,000,000 Equity
Loan: 1,000,000
Capital: 10,000,000

Loan/Account Payable
Cash: 1,000,000 Land: 2,000,000
The Main Objectives of
Managerial/Cost Accounting
 Providing managers with information for
decision making and planning.
 Assist managers in directing and
controlling operations.
 Motivating mangers towards the firms
goals.
 Measuring the performance of
managers.
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 Cost Accounting Overview
 There are no fixed rules governing how a firm should
keep track of costs, although there are many formal
methods available for users.

 Cost accounting measures are the predominant financial

drivers in day to day business decisions.

 Good cost accounting is vital to understanding the

profitability of current activities and predicting the
profitability of future activities.

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 Elements of Cost Accounting
 Basic Cost Terms and Concepts

 Fixed and Variable Costs

 Costing Systems

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 Elements of Cost Accounting:
Common Cost Terms Defined
 Fixed Costs  Indirect Cost
Relatively independent of Not traceable to a particular
production rate production unit
Indirect Material - Needed
 Variable Costs for production but not
Related to production or optional part of the product (ex.:
projects paper towels)
Indirect Labor
 Direct Cost
Direct Material - consumed in  Overhead
making a particular product Many other costs such as
Direct Labor marketing, sales etc.
Traceable
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Other Costing Terms
 Opportunity Costs
 Value of alternate
activities
 Sunk Costs
 $ already spent
 Differential Costs
 Difference between two
choices
 Marginal Costs
 Extra cost of producing
one additional unit
 Average Cost
 Total cost divided by the
quantity manufactured
 Cost of Goods Sold
 Total (sort of) cost of
manufacturing
 Suspense Accounts
 Holding area for later
decisions
 Expensing and
Capitalizing
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Product Cost Accounting-
”Standard Cost”
 It is common to use an estimate of cost to establish
pricing
 This may come from historical data or engineering estimates

 Actual costs may differ from “standard” cost

 The difference is usually known as the Variance

 A firm doing thorough cost accounting calculates
variances for every activity and analyzes the amounts,
which may be plus or minus

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Product Cost Allocation Example
Product A Product B

Labor & Overhead Labor &

Materials Materials
A B

Paint Cost Salaries Rent Toxic Waste

A&B A&B B

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Fixed and Variable Cost Information
to Make Decisions
 In Financial Accounting we usually report product costs and
operating period costs:
 Sales
 -COGS
 Material
 Labor

 Overhead

=Gross Profit
-Operating Expenses
S,G&A
=Pretax Income

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 Fixed or Variable Cost
__ Product A Manager’s Salary
___ Rent
___ Product B hourly manufacturing
Fixed Cost – F labor
___ Metal for a car
___ Sales Associates’ wages
___ Engineer’s Computer
___ Production Machinery
Variable Cost - V ___ Utilities
___ Firm’s Accountant’s Salary

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 Total Cost Formula

Total Cost = Fixed Cost + Variable Cost

TC = F + V

Remember: Variable Costs are “per unit”, so

TC = F + (V/Q * Q)

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Internally, a manager needs to know the
effect of expanding or decreasing output

 Incremental Profit = Incremental Revenue -

Incremental Costs

 How will Incremental Costs vary?

 We proceed by examining the costs of each

department in order to classify them into Fixed and
Variable Costs

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Classifying Costs
– Variable Fixed
 Production
• Labor 10,000 -------
• Material 15,000 -------
• OH 2,000 10,000
• Totals 27,000 10,000
 Sales
• Labor 25,000 --------
• Supplies 5,000 --------
• OH ------ 10,000
• Totals 30,000 10,000
 Admin
• Wages -------- 30,000
• OH -------- 15,000
• Totals -------- 45,000
 Total 57,000 65,000
 TC=F+VQ=65,000+57,000/10,000 (Q)=65,000+5.7Q
 (Assumes a base production rate of 10,000 units)
Cost Systems

Two main types

 Job Order/Project

 Process

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 Job Order Cost System
 Used when goods are produced in distinct batches and
there are significant differences between batches

 Costs are accumulated by job order

 Unit costs are determined by dividing the total job order

cost by the number of units produced

 Examples: custom software, machine job shops, corporate

internal R&D (IR&D)

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Process Cost Systems
 Used in repetitive production environments where
large numbers of identical or very similar products
are manufactured
 Costs are accumulated by department, rather than by
job order
 The average cost is found by averaging the total
costs incurred over the units produced
 Examples: paper, drugs, milk

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Calculating the Incremental Profit

 TC=F+VQ=65,000+57,000/10,000(Q)
=65,000+5.7Q

 So, if we manage to sell another 5,000 units at 16, we would

earn:

 Incremental Profit=Incremental revenue - Incremental Cost

 =(5,000 x 16) – (5.70 x 5000)

 = 80,000 - 28,500= 51,500

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Breakeven Formula
Fixed Cost + Variable Cost + Profit = Sales

*The breakeven point is where Profit = 0

Example: Sam is a candy bar vender and sells candy

bars at sporting events. His annual vendor license is
$500. Sam attends 50 sporting events a year. He
buys candy bars for 0.50 and sells them for 1.00. He
expects to make 200 at each event.

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Breakeven Formula Con’t.
How many candy bars does Sam have to
sell at each event to meet his
expectations?

(500/50) + 0.50x + 200 = 1.00x

210 = 0.50x
x = 420

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Breakeven Formula Con’t.
What is his breakeven point for the year?

500 + 0.50x + 0 = 1.00x

500 = 0.50x
x = 1,000

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Session Wrap-up
 General ledger, T-accounts, double entry, and
relation to financial statements
 Basic terms and typical accounts
 Fixed and Variable cost accounting
 Incremental Costs and Profit
 Cost Systems

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