Cost Accounting: With Integrated Data Analytics, An Indian Adaptation

Karen Congo Farmer, Amy Fredin, Pankaj Kumar Baag

ISBN: 9789363863835

840 pages

For more information write to us at: acadmktg@wiley.com

Description

This book helps students develop the critical thinking skill set needed to understand costing concepts. Through storytelling, students develop a deeper understanding of cost accounting fundamentals, allowing them to apply their knowledge to modern business scenarios and develop the competencies and decision-making skills needed to become the future accounting professional.

It focuses on strengthening the coverage by including new and updated materials. Throughout the book, students work through a variety of assignments and integrated cases that leverage market-leading technology, helping them to make informed business decisions and think critically about data.

About the Author

Karen Congo Farmer

Raised on a farm in southwestern Ontario, Canada, I learned from an early age the value of hospitality, music, seasons, finishing a job, and telling a good story.

McMaster University introduced me to a professor who inspired a love of accounting. She was authentic and warm—a role model for my future teaching. As an auditor at Ernst & Young, I earned my CPA designation and experienced business and networking firsthand. Next, I held a dual role at the beautiful Western University: Accountant by day in Financial Services, and accounting lecturer in the evening. Soon enough, I became a full-time lecturer. In addition, a 10+ year instructor role with CPA Ontario, preparing students for their professional exams, was pivotal to my development.

Amy J Fredin

My story begins in a small town in western Minnesota, where I grew up with music and sports, camping and boating, family time and fierce friendships. I studied music and accounting at the College of St. Benedict and from there worked in public accounting and obtained my CPA. I then went back to school for my MBA at St. Cloud State University. While completing that degree, I started teaching in the accounting program at Alexandria Technical College. It was there that my love for teaching began.

Five years later, my story moves to Nebraska, where I pursued a PhD in accounting at the University of Nebraska—Lincoln (go Big Red!). After I completed that degree, St. Cloud State invited me back, this time to join the Accounting Department as a faculty member. In my more than a dozen years so far at SCSU, I have enjoyed teaching, researching, working with students and colleagues, leading case discussions in executive training programs, and connecting with employers in the community.

Pankaj Kumar Baag

During my school years, I traveled extensively across India. Once I completed my degree in Physics (honors), I embarked on a career in the BFSI sector, which took me across international borders. It was in this role that I received rigorous training in credit appraisal, gaining a thorough understanding of financial and management accounting. This knowledge spurred me to pursue further qualifications, leading me to earn my CAIIB, M.Com, M.FM, and several postgraduate diplomas over the course of 10 years. This educational journey ultimately inspired me to shift to academia as a full-time professor. I earned my PhD from IIM Calcutta and subsequently joined the faculty at IIM Kozhikode.

Over the past decade, I’ve co-authored seven books, authored numerous research papers, working papers, and case studies, which have earned me several awards at international conferences and in journals.

I’ve supervised and continue to supervise PhD candidates and Master’s students on their theses. My expertise also led me to teach management accounting to PGP and EPGP students at IIM Kozhikode for over 10 years. Additionally, I teach a variety of subjects, including Commercial Banking, Microfinance, Project Finance, Entrepreneurial Finance, Investment Banking, and Fintech at IIM Kozhikode. I’ve been involved in several management development programs, which often require a deep understanding of management accounting. For the past seven years, I’ve coordinated the Business Project Plan core course for the EPGP at IIMK, where practical application of management accounting is essential.

Table of Contents

1 Cost Accounting Has Purpose

1.1 Companies Know Their Purpose: Do You Know Yours?

Purpose Is Meaningful

Company Strategy: Turning Purpose into Action

Your Own Strategy

Measures, Targets, and Results on the Balanced Scorecard

1.2 The Purpose of Cost Accounting

Data Analytics in Action: Data Analytics Isn’t New

Big Picture Thinking and Decision-Making

Using Data Analytics to Problem-Solve

Data Analytics in Action: Keeping Score

The Value Chain

1.3 What Guides Our Purpose?

The Importance of Ethics in Business

Governing Bodies Within Accounting

Appendix 1A: Why You Should Learn How to Learn

Your Role as a Lifelong Learner

Fixed versus Growth Mindset

Purposeful Pedagogy

How This Text Can Help You Learn

2 Refresher on Cost Terms

2.1 Overview of Cost

Using Financial Statements to Interpret Revenues and Expenses

Costs versus Expenses: Let’s Get Specific

Opportunity Costs and Sunk Costs

2.2 Costs for Service Providers, Merchandisers, and Manufacturers

Service Providers

Data Analytics in Action: Cutting Corners

Merchandisers

Manufacturers

2.3 Defining and Assigning Costs

Product and Period Costs

Manufacturing and Nonmanufacturing Costs

The Cost Object, Direct Costs, and Indirect Costs

Prime Costs and Conversion Costs

2.4 Variable and Fixed Costs and the Relevant Range

Variable Costs

Managing Variable Costs

Data Analytics in Action: It’s a Snap!

Fixed Costs

Managing Fixed Costs

Relevant Range and Costs of Capacity

Fixed Costs on a Per-Unit Basis: Be Careful

2.5 Tracing Product Costs from the Balance Sheet to the Income Statement

Inventoriable Costs

Raw Materials Inventory on the Balance Sheet

Work-in-Process Inventory on the Balance Sheet

Finished Goods Inventory on the Balance Sheet

Cost of Goods Manufactured

Cost of Goods Sold

2.6 Comparing Gross Margin and Contribution Margin Income Statements

Gross Margin versus Contribution Margin

Full Costs

3 Cost Behavior and Cost Estimation

3.1 The Basics of Cost Behavior

Selecting Cost Drivers

Data Analytics in Action: Counting Cars

The Relevant Range, and Costs Within It

3.2 Estimating Costs Is Crucial: Here’s How

Account Analysis Method

High-Low Method

Data Analytics in Action: Scatter to Avoid Slacking?

Excel Tutorial: The Scatter Plot

3.3 Sophisticated Cost Estimation with Regression

Overview of the Regression Method

Excel Tutorial: Regression Analysis

Evaluating Regression Output

Assumptions of Regression

Multiple Regression

3.4 When Costs Are Nonlinear: The Learning Curve

Applying the Learning Curve

Learning Curve Impacts on Costs and Prices

4 Cost-Volume-Profit Analysis

4.1 Contribution Margin and the Break-Even Sales Point

Data Analytics in Action: Consuming Coffee and Trends

Contribution Margin

Number of Sales in Units to Break Even

Sales in Dollars to Break Even

What Happens After Break-Even Analysis?

4.2 Cost-Volume-Profit (CVP) Analysis

It’s Graphic: Understanding CVP Relationships

The Relevant Range: Quite Relevant

Margin of Safety

4.3 Break-Even with Target Profit and Taxes

Modifying the Break-Even to Include Target Profit

Modifying the Break-Even to Include Target Profit After-Tax

4.4 Break-Even with Multiple Products

Data Analytics in Action: Big Data for Bigger Sales

4.5 Operating Leverage and Sensitivity Analysis

Sensitivity Analysis Shows the Effects of Operating Leverage

Using the Degree of Operating Leverage Multiplier

4.6 CVP Analysis for Service and Nonprofit Organizations

Data Analytics in Action: More Service, Fewer Costs

5 Relevant Costs for the Decision-Maker

5.1 Decision-Making Made Easier

Data Analytics in Action: Don’t Succumb to Analysis Paralysis

5.2 What Are Relevant Costs and Relevant Information?

How Relevant Information Supports Decision-Making Sunk Costs

The Total Cost Approach versus the Relevant Cost Approach

5.3 Management Decisions Requiring Use of Relevant Costs

Insource versus Outsource

Keep versus Drop

Excel Tutorial: Goal Seek

Product-Mix Decisions

Data Analytics in Action: Tasty, Fast, or Both?

Excel Tutorial: Solver

Special Orders

5.4 Decision-Making and Opportunity Costs

5.5 Fixed Costs and Decision-Making

Direct Fixed Costs

Common Fixed Costs

Allocated Fixed Costs

6 Mastering the Master Budget

6.1 Why Budget?

Budgeting and Behavior Modification

Data Analytics in Action: Budgeting Made Fun?

Types of Budgets

Budgeting and Ethical Considerations

6.2 The Master Budget

Revisiting the Strategic Planning Process

Organizational Structure and Responsibility Centers

The Master Budget Inputs and Outputs

Follow-Up and Feedback

6.3 The Operating Budget and the Budgeted Income Statement

Sales Forecast: It All Starts Here

Production Budget

Direct Materials Purchases Budget

Direct Labor Budget

Manufacturing Overhead Budget

Cost of Goods Sold and Cost of Goods Manufactured Budgets

Selling, General, and Administrative Expenses Budget

Non-Operating Expenses Budget

6.4 The Financial Budget and the Budgeted Balance Sheet

Budgeted Inventory Balance

Cash Receipts, Cash Collections, and the Budgeted Accounts Receivable Balance

Data Analytics in Action: Banks Expedite Loan Collections

Cash Disbursements and Budgeted Accounts Payable Balance

Budgeted Cash Balance

6.5 Budgeting in Retail and Service Organizations

Budgeting for Retailers

Budgeting for Service Providers and Nonprofit Organizations

7 Capital Budgeting Choices and Decisions

7.1 Capital Budgeting: The Point and the Context

Data Analytics in Action: Using Data to Scout a Location

The Circle of Life of Businesses

Return on Investment (ROI)

7.2 Elements of Capital Budgeting Decisions

Timelines

Time Value of Money

Cash Flows: Lump Sums and Annuities

Discount Rate

Tax Rate

Depreciation Tax Shield: Yes You Can!

Data Analytics in Action: Data Informs Decision-Making

7.3 Tools to Evaluate Capital Budgeting Choices

Net Present Value (NPV): A Powerful Machine

Internal Rate of Return (IRR)

Payback Period

Accounting Rate of Return (ARR)

Profitability Index

7.4 Sensitivity Analysis

7.5 Making the Decision

7.6 The Follow-Up

Post-Investment Audit

Performance Evaluation

Time Value of Money Tables

8 Job Costing Visualized

8.1 Job Costing: An Overview

Defining Jobs and Job Costing

Revisiting Product Costs

Actual versus Normal Costing

Data Analytics in Action: Is It Hot in Here?

How Job Costing Is Organized

8.2 Actual and Applied Manufacturing Overhead

Accounting for Actual and Applied Manufacturing Overhead

Calculating Applied Manufacturing Overhead

Budgeting Manufacturing Overhead for a Specific Job

8.3 Putting It Together: Costing Jobs and Units

Cost Flows, Accounts, and Journal Entries

Year-End Adjustments

Income Statement Impacts of Job Costing

8.4 Job Costing and Decision-Making

Job Costing’s Impacts on Decisions

Data Analytics in Action: Information or Invasion?

Ethical Considerations Related to Job Costing

8.5 Job Costing in Service Organizations

9 Activity-Based Costing

9.1 Traditional Job Costing and ABC Compared

Drawbacks of Traditional Costing

The Advantage of Activity-Based Costing

A Better Cost with Activity-Based Costing

Data Analytics in Action: A Sweet Outcome

9.2 The Cost Hierarchy, Activities, and Cost Drivers

Identifying Activities as Cost Pools

Cost Drivers

The Cost Hierarchy

9.3 Using Activity-Based Costing for Product Costing

Step 1: Identify Direct Costs

Step 2: Identify Activities and Cost Drivers

Step 3: Calculate Cost Driver Rates and Assign MOH

Step 4: Record MOH Costs

9.4 Decision-Making Outcomes, Including Time-Driven Activity-Based Costing (TDABC)

Impacts of Activity-Based Costing on Product and Service Costs

Who Should Use Activity-Based Costing?

Broader Outcomes of Using Activity-Based Costing

Time-Driven Activity-Based Costing: A Time-Saving Alternative

Data Analytics in Action: An Impressive By-Product

10 Variance Analysis and Standard Costing

10.1 A Variety of Purposes for Budgets and Variance Analysis

Motivate and Benchmark

Plan and Control

Evaluate Performance and Troubleshoot

Data Analytics in Action: Process Improvements at Nike

10.2 Master Budget and Flexible Budget Variances

Limitations of the Master Budget

The Flexible Budget

10.3 Standard Costing

The Purpose of Standard Costing

Setting and Updating Standards

Data Analytics in Action: A New Way of Checking Out the Competition’s Standards

10.4 Direct Materials and Direct Labor Variances

Overview of Production Variances

Direct Materials Variances

Direct Labor Variances

10.5 Variable-MOH and Fixed-MOH with Journal Entries

Variable-MOH: Price and Efficiency Variances

Data Analytics in Action: Calculate All the Variances

Fixed-MOH: Price and Volume Variances

Journal Entries to Close Variances

10.6 Sales Variances

Master Budget Sales Variance: Sales Price Variance and Simplified Sales Activity Variance

Comprehensive Sales Activity Variance: Sales Mix Variance and Sales Quantity Variance

Sales Quantity Variance: Market Size Variance and Market Share

11 Process Costing

11.1 Process Costing: An Overview

Data Analytics in Action: Data Mining for Mining Data

Job Costing versus Process Costing

The Importance of Determining WIP Inventory Correctly

The Steps of Process Costing

11.2 Step 1: Verify Physical Units in the Period and Identify Degree of Completion

No Beginning or Ending WIP Inventory

With Only Ending WIP Inventory

With Beginning and Ending WIP Inventory

11.3 Step 2: Determine Status of Physical Units and Convert to Equivalent Units

Using the FIFO Method to Determine Status of Physical Units

Using the Weighted-Average Method to Determine Status of Physical Units

11.4 Steps 3 and 4: Account for Costs and Calculate Cost per Equivalent Unit

Using the FIFO Method to Calculate Cost per Equivalent Unit

Using the Weighted-Average Method to Calculate Cost per Equivalent Unit

11.5 Step 5: Assign Costs to WIP Inventory and FG Inventory with Journal Entries

Assigning Costs Using the FIFO Method with Corresponding Journal Entries

Assigning Costs Using the Weighted-Average Method with Corresponding Journal Entries

Applications of Determining Product Costs

11.6 Costs Transferred-In from Another Department

Transferred-In Costs Using the FIFO Method

Transferred-In Costs Using the Weighted-Average Method

11.7 Operation Costing

12 Absorption versus Variable Costing

12.1 Absorption Costing: An Overview

The Purpose of Absorption Costing and How It Works

Management Decision-Making and Absorption Costing

Data Analytics in Action: This Machine Is Learning!

Balance Sheet and Income Statement Impacts of Absorption Costing

12.2 Variable Costing: An Overview

The Purpose of Variable Costing and How It Works

Balance Sheet and Income Statement Impacts of Variable Costing

12.3 Side-by-Side: Comparing Absorption Costing and Variable Costing

The Two Methods Compared: Inventory Costs and Balance Sheet Impacts

The Two Methods Compared: COGS, Operating Income, and Income Statement Impacts

12.4 Determining Denominator Volumes for Fixed-MOH

Managing Capacity

Denominator Volume Choices

Further Outcomes of Denominator Decisions

13 Data Analytics

13.1 Big Data? Data Analytics? Challenges and Opportunities

Overview of Data

Big Data and Data Analytics in Cost Accounting

Challenges and Opportunities

Data Analytics in Action: Meeting the Challenges

13.2 Sourcing and Storing Data

The Role of Data Analytics in Decision-Making

Data Sources and Data Storage

The Cost of Data and Its Ethical Considerations

Data Analytics in Action: When Data Is Especially Costly

13.3 Categories of Data Analytics Techniques

Overview of Data Analytics Categories

Descriptive Analytics

Diagnostic Analytics

Predictive Analytics

Prescriptive Analytics

Data Analytics in Action: Price Check on Aisle

13.4 Your Role in Solving Business Problems with Data Analytics

Data Analytics Outcomes in Cost Accounting

Being Career-Ready

14 Support Department Costing

14.1 Support Department Costing: An Overview

Types of Support Departments and Their Costs

Allocating Support Department Costs

Data Analytics in Action: Keep or Drop?

Cost Allocation Bases for Support Departments

14.2 Methods of Allocating Support Department Costs

The Direct Method Illustrated

The Step Method Illustrated

The Reciprocal Method Illustrated

Excel Tutorial: The Reciprocal Method

Comparing the Three Allocation Methods

Data Analytics in Action: This Call May Be Analyzed

14.3 Allocating Common Costs and Bundled Revenues

Stand-Alone Cost Allocation Method

Incremental Cost Allocation Method

Allocating Revenue from Sales of Bundled Products/Services

15 Joint Costs and Decision-Making

15.1 Joint Costs—Description and Illustration

15.2 Methods of Allocating Joint Costs

Sales Value at Split-Off Method

Net Realizable Value (NRV) Method

Physical Quantities Method

Choosing an Allocation Method

15.3 Joint Costs and Decision-Making: Should We Sell or Process Further?

Relevance of Joint Costs to Sell-or-Process-Further Decisions

Sell-or-Process-Further Decision Factors

Data Analytics in Action: More Fresh Options

Decision-Making and Performance Evaluation

15.4 A Decision: How Should We Account for By-Products and Scrap?

By-Products Revisited

Data Analytics in Action: Analysis Reduces Waste

The Production Method

The Sales Method: By-Products and Scrap Recognized at Time of Sale

Production Method versus Sales Method

16 The Art and Science of Pricing to Optimize Revenue

16.1 Pricing: Art + Science + Psychology

Truths About Pricing

Consider the Context: Customers, Costs, and Competitors

16.2 Special-Order Pricing: Be Opportunistic

Lowest Acceptable Special-Order Price

Relationship to Relevant Costs for the Decision-Maker

16.3 Cost-Plus Pricing: If You Can Sell the Plus, Charge It

Overview of the Cost-Plus Method

The Calculation: A Starting Point

Data Analytics in Action: Buy it Again? Using Data to Set Prices

Comparing Special-Order Pricing to Cost-Plus Pricing

16.4 Target Costing for Target Pricing—Backward but Brilliant

Steps to Implement Target Costing for Target Pricing

The Value in Value Engineering

Data Analytics in Action: Ensuring the Value of Business Activities

16.5 Consumers and Pricing Practices

Consumer Perceptions and Pricing

Other Pricing Practices: Fair or Illegal?

Data Analytics in Action: No Free Parking

17 Management Control Systems and Transfer Pricing

17.1 The Need for an Effective Management Control System

Centralized versus Decentralized Organizations

Goal Congruence

Components of a Management Control System

17.2 How Responsibility Centers Work

Characteristics of Responsibility Centers

Cost Centers

Revenue Centers

Profit Centers

Investment Centers

Data Analytics in Action: Data Analytics Hits It Out of the Park!

17.3 How to Measure Performance of Investment Centers

Return on Investment (ROI) and Its Components

Residual Income (RI)

Economic Value Added (EVA)

17.4 Transfer Pricing: An Overview

The Genesis of Transfer Pricing

Determining the Optimal Transfer Price Range

How Companies Set Transfer Prices

Management and Transfer Pricing

Transfer Pricing in Multinational Companies

18 Business Strategy, Performance Measurement, and the Balanced Scorecard

18.1 An Overview of Business Strategy

The Strategic Planning Process

A Closer Look at Business Strategy

18.2 Performance Measurement Guides Performance

Congruent Outcomes: Linking Business Strategy to Employees’ Objectives

The Performance Measurement Process

Traits of Financial Performance Measures

Traits of Nonfinancial Performance Measures

18.3 Using the Balanced Scorecard to Assess Company Performance

Balancing the Four Perspectives

Linking Business Strategy to the Balanced Scorecard

Data Analytics in Action: New Measures and Targets

Evaluating Success

Company Index (Online )

Subject Index (Online )

Review of Key Formulas KF-1

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Cost Accounting: With Integrated Data Analytics, An Indian Adaptation

Description

About the Author