Accounting reference lists…

I just wandering around, browsing for some songs and some accounting information while finishing on something that I really need to do. Sigh! BUT I came across some good sites for students to do some researching or knowledge seeking. Websites, videos, slides etc…So I will post some first and maybe if I have time, I will continue to contribute here…

http://www.futureaccountant.com

http://www.accountingdetails.com

later…

ACC2232 – Inventory Control and Valuation

In order for the organization to stay competitive, the inventory control and valuation is important. An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.

For your benefits, let’s watch some short videos regarding the valuation of inventory.

The two most widely used inventory accounting systems are the periodic and the perpetual.

  • Perpetual: The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times. It maintains a separate account in the subsidiary ledger for each good in stock, and the account is updated each time a quantity is added or taken out.
  • Periodic: In the periodic inventory system, sales are recorded as they occur but the inventory is not updated. A physical inventory must be taken at the end of the year to determine the cost of goods

Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.

JUST IN TIME (JIT)

  • No material are purchased and no product are manufactured until they are needed
  • To reduce or eliminate inventories at every stage of production
  • Minimize storage cost

FIFO (First In First Out)

  • First material in will be the first material issued
  • Most logical method and accepted by IRB
  • Lower cost, higher profit

LIFO (Last In First Out)

  • Most recent material received, will be the first to be issued
  • Not really logical and not accepted by IRB
  • Higher cost, lower profit

WEIGHTED AVERAGE

  • Material issued is valued at average cost price
  • Accepted by IRB
Weighted Average  = Total Cost of Inventory
Unit Cost Total Units in Inventory

Like FIFO and LIFO methods, AVCO is also applied differently in periodic inventory system and perpetual inventory system. In periodic inventory system, weighted average cost per unit is calculated for the entire class of inventory. It is then multiplied with number of units sold and number of units in ending inventory to arrive at cost of goods sold and value of ending inventory respectively. In perpetual inventory system, we have to calculate the weighted average cost per unit before each sale transaction.

There are so many videos you can find in the YouTube. Varies in minutes duration but why not? Just spend a couple of minutes to understand various presentations. Who knows, you might get addicted! Hahaha

I also uploaded the a calculation sheet to calculate the FIFO, LIFO and WACO. If possible try to download this, make 3 copies and we will use them in class.

Download this… Store Ledger Card

Example – FIFO

Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system.

Mar 1 Beginning Inventory 68 units @ $15.00 per unit
5 Purchase 140 units @ $15.50 per unit
9 Sale 94 units @ $19.00 per unit
11 Purchase 40 units @ $16.00 per unit
16 Purchase 78 units @ $16.50 per unit
20 Sale 116 units @ $19.50 per unit
29 Sale 62 units @ $21.00 per unit

Example – LIFO

Use LIFO on the following information to calculate the value of ending inventory and the cost of goods sold of March.

Mar 1 Beginning Inventory 60 units @ $15.00
5 Purchase 140 units @ $15.50
14 Sale 190 units @ $19.00
27 Purchase 70 units @ $16.00
29 Sale 30 units @ $19.50

Example – AVCo

Apply AVCO method of inventory valuation on the following information, first in periodic inventory system and then in perpetual inventory system to determine the value of inventory on hand on Mar 31 and cost of goods sold during March.

Mar 1 Beginning Inventory 60 units @ $15.00 per unit
5 Purchase 140 units @ $15.50 per unit
14 Sale 190 units @ $19.00 per unit
27 Purchase 70 units @ $16.00 per unit
29 Sale 30 units @ $19.50 per unit

 

ACC 2232 – Economic Order Quantity (EOQ)

What is EOQ?

EOQ is the acronym for economic order quantity. The economic order quantity is the optimum quantity of goods to be purchased at one time in order to minimize the annual total costs of ordering and carrying or holding items in inventory.

EOQ is also referred to as the optimum lot size.

The formula to calculate the economic order quantity is the square root of [(2 times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost per unit to carry an item in inventory)].

EOQ 1EOQ 2
HOLDING COST

  •  Interest on fund borrowed
  •  Storage charges (rent)
  •  Insurance and security
  •  Cost of obsolescence of stocks

ORDERING COST

  •  Clerical costs preparing purchase order and transportation

ORDERING COST

  •  Cost without having stock
  •  Loss of contribution
  •  Loss of customer future sale/goodwill
  •  Production stoppage
Let’s try this!
Annual demand quantity : 1500 units
Ordering cost: RM30 per order
Cost per unit of item: RM5
Holding cost: 20% of inventory cost
Calculate the EOQ.
Another one…
Nadzmi runs a mail-order business for gym equipment. Annual demand for the AbsFlexer is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?
However, the EOQ implementation has to be based on the following assumptions….
Assumptions:

  • Demand is constant
  • Holding and ordering cost are constant
  • Unit price is constant
  • Quick delivery
  • Replenishment is made instantaneously (the whole batch is delivered at once)

ACC 2232 – Chapter 2 Cost Accounting Concept

According to Wikipedia…Classification of cost means, the grouping of costs according to their common characteristics. … Indirect costs are allocated or apportioned to cost objects. By Functions: production,administration, selling and distribution, R&D. By Behavior: fixed, variable, semi-variable.

cost classification

Let’s look at the classification of cost by decision making.

RELEVANT AND IRRELEVANT COST (AccountingExplained)

The classification of costs between relevant costs and irrelevant costs is important in the context of managerial decision-making.

In any managerial decision involving two or more alternatives, the prime focus of analysis is to find out which alternative is more profitable. The profitability of alternatives is determined by considering the revenues generated by and costs incurred under each alternative. Some costs may stay the same regardless of which alternative is chosen while some costs may vary between the alternatives. The classification between relevant and irrelevant costs is useful in such situations.

Examples of situations in which the relevant vs irrelevant classification is useful include decisions regarding:

  • Shutting down a division of a business,
  • Accepting an special order at lower price,
  • Making a product in-house or purchasing it from outside,
  • Selling a semi-finished product or processing it further, etc.

Relevant costs

Relevant costs are costs that are affected by a managerial decision in a particular business situation. In other words these are the costs which shall be incurred in one managerial alternative and avoided in another. As the name suggests they are ‘relevant’ for managerial analysis and should be considered in all calculations made for the purpose.

Irrelevant costs

Irrelevant costs are costs that are not affected by the ultimate decision. In other words, these are the costs which shall be incurred in the all managerial alternatives being considered. Since they are the same in all alternatives, they become irrelevant and need not be considered in calculations made for managerial analysis.

Try to do this!

Vital Industries is a company that manufactures personal care products. It has three divisions: hair care, skin care and dental care. Following is an extract from the financial statements for the year ending 31 December 2014:

Hair Care Skin Care Dental Care
Revenue $900 million $600 million $300 million
Net income/(loss) $210 million $100 million ($50 million)

In the board meeting summoned for review of financial statements, a director proposed that the company should dispose of the dental care division because it is loosing money. The CEO argued that the board can’t conclude that a segment is losing money just because it generated net loss for a period. He suggested that the company’s chief financial officer should conduct a detailed analysis for presentation in the next board meeting. Being the company’s management accountant, the CFO asked you to identify which of the following costs are relevant for the decision:

  1. CEO’s salary
  2. Salaries of Dental Care workers who can be laid-off
  3. Salaries of Dental Care workers who can’t be laid-off
  4. One-time retirement benefits to be paid to laid-off workers
  5. Cost of raw materials consumed by Dental Care division
  6. Annual directors’ fee
  7. Interest paid on loans raised for Dental Care division
  8. Salary of the Dental Care chief operating officer
  9. Company-wide quality certification fee
  10. License fee paid for the rights to manufacture dental care products
  11. Head office rent
  12. Audit fee (if it doesn’t depends on the number of divisions)

Discuss and debate.

Potential marks ♥♥♥

Answer will be published on 27th July 2017 at 12 noon.

AVOIDABLE AND UNAVOIDABLE COST (my accounting course)

In a down economy, management is often faced with the decision of cutting branches, departments, and even products. In order to save the company money, managers tend to look the departments or products that are losing money or not turning a profit. A lot of times shutting down departments simply because they are losing money is not always a good idea. In fact, shutting down some non-profitable departments might even cost the company more money. Managers need to take a look at two main expenses when making a decision to close a department: avoidable costs and unavoidable costs.

Avoidable cost

Avoidable costs are costs that can be eliminated if a department is closed. Salaries are a good example of avoidable costs. When the branch closes, the salaries are stopped as well.

Unavoidable cost

Unavoidable expenses, on the other hand, are expenses that will not be eliminated if a department is closed. Unavoidable expenses are also called inescapable expenses for this very reason. A good example of an unavoidable expense is rent. Think if a business rents a 10,000 square foot building and uses it for three different departments or branches. Each department earns revenue and pays for a third of the rent expense. If one of the branches is closed, the company will still have to pay to rent the entire building. This rental expense isn’t eliminated if the department is closed. In this case, the company might be better off keeping the non-profitable department open because it helps contribute one third of the rental expenses.

 SUNK COST (accounting tools)

A sunk cost is a cost that an entity has incurred, and which it can no longer recover by any means. Sunk costs should not be considered when making the decision to continue investing in an ongoing project, since you cannot recover the cost. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the past. They do not want to “lose the investment” by curtailing a project that is proving to not be profitable, so they continue pouring more cash into it. Rationally, they should consider earlier investments to be sunk costs, and therefore exclude them from consideration when deciding whether to continue with further investments.

An accounting issue that encourages this adverse behavior is that capitalized costs associated with a project must be written off to expense as soon as the decision is made to cancel the project. When the amount to be written off is quite large, this encourages managers to keep projects running.

Examples of Sunk Costs

Here are several examples of sunk costs:

  • Marketing study. A company spends $50,000 on a marketing study to see if its new auburn widget will succeed in the marketplace. The study concludes that the widget will not be profitable. At this point, the $50,000 is a sunk cost. The company should not continue with further investments in the widget project, despite the size of the earlier investment.
  • Research and development. A company invests $2,000,000 over several years to develop a left-handed smoke shifter. Once created, the market is indifferent, and buys no units. The $2,000,000 development cost is a sunk cost, and so should not be considered in any decision to continue or terminate the product.
  • Training. A company spends $20,000 to train its sales staff in the use of new tablet computers, which they will use to take customer orders. The computers prove to be unreliable, and the sales manager wants to discontinue their use. The training is a sunk cost, and so should not be considered in any decision regarding the computers.
  • Hiring bonus. A company pays a new recruit $10,000 to joint the organization. If the person proves to be unreliable, the $10,000 payment should be considered a sunk cost when deciding whether the individual’s employment should be terminated.

OPPORTUNITY COST (BusinessDictionary)

A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.
Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss.

Example of opportunity costs;

  • The CEO of Ace Corporation considered the merger that the competing company offered him, but after examining the opportunity cost he decided that the sacrifices were too high and the benefits were too low to accept the deal.
  • I would have gone to the movie since it cost less and the tickets were not refundable but I have to see this concert even if the opportunity cost doesn’t make sense to most people.
  • When deciding on whether or not to go back to college full-time, Jack included the opportunity cost of foregoing a stable paycheck in his decision.

Controllable Costs (accountingverse)

Controllable costs are costs that can be influenced or regulated by the manager or head responsible for it.

For example: direct materials, direct labor, and certain factory overhead costs are controlled by the production manager. Another example: the sales manager has control over the salary and commission of sales personnel.

Uncontrollable Costs

From the term itself, uncontrollable costs are those that are not under the control of a specified manager. These cannot be influenced by decisions or actions of the manager. These costs are imposed by the top management or allocated to several departments. For example, a company-wide advertising cost that is allocated by the central office to different departments is not under the control of the department heads.

Other examples include depreciation, insurance, share in rent, share in organization-wide security costs, etc.

Try to do this!

To effectively evaluate the performance of the production department of ABC Company, the management accountant wants to determine the controllable and uncontrollable costs from the following items:

  1. Direct materials
  2. Direct labor
  3. Factory overhead and other charges
    1. Indirect materials
    2. Indirect labor (supervision)
    3. Depreciation
    4. Insurance
    5. Allocated repairs and maintenance
    6. Allocated rent and utilities expense

Discuss and debate.

Potential marks ♥♥♥

Answer will be published on 27th July 2017 at 12 noon.

COST BEHAVIOUR

Each cost has its own behaviour. Basically, there are 4 kinds of cost behaviour that we need to know and it relates to our daily life. We are making expenses but some of us may not know the cost classification and most of us making important decision based on wrong facts… FaCT!. See below

cost behaviour

 

 

 

 

ACC 2232 – Chapter 1 Introduction To Cost Accounting

In this topic, you will learn about cost and the importance of it in determining the pricing of a product or service. It can also be expanded to greater detail for Managerial Accounting where it helps us in decision making. Well it is too early to learn Management Accounting but first you have to prepare a sound foundation to know what is cost accounting is all about.

COST

Anything that involve money to spend on something to get something going…hehe. Or to create something. If you want to go for a movie, there is cost involve. If you want to eat at McDonalds, of course there is also cost. In short, the thing you spent on something whether it is paid or still due to be paid, as long as you have already spent….that is COST!

I always remember there was a saying in one of the book I’ve read… “When you start calculating cost, the cost begins…..”

COSTING

The word ‘ting’ at the end of the word cost….represents the action. Now I’m going to a little bit of english here, but you have to know this. Costing is a technique and process of finding the right way of ascertaining the cost. Of course, there are a lot of things you have spent on doing something, but not all the things that you spent can be put to the costing of that particular activity. There are certain rules  and principles we have to follow. Like everything you do, there are ways on how to do them.

COST ACCOUNTING

When the two words merge together, it is now can be defined as ” the process of accounting for cost, which begin with the recording of income and expenditure, on the basis of which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs. – CIMA. I’m going a bit formal huh!. Well, that’s the definition of cost accounting.

 

Objectives-and-functions-of-cost-accounting

To cut it short, there is more.

  • Determining product cost and pricing

Know the cost, mark-up a bit and there you have your selling price. Make sure that the selling price should be enough to cover the cost of producing the product and yield satisfactory profits. Or else, the owner will make noise, and ultimately you’ll be fired! Hahaha

  • Planning and control

Planning is always an important process to achieve organizations’ objective. Cost is one of them. Any projects, production even going to war, you have to come out with a plan. Or else, you will ended losing. When you plan, you’ll know how much to produce, what to produce, when to produce, where to produce, therefore you can have an estimate ton the cost of each level of activities. Remember, Plan to Fail don’t Fail to Plan.

Control is also an important criteria in managing the cost. You need to be in control of your cost. It can be assigning responsibility, reviewing the production process, regular maintenance on the machines, measuring the performance and comparing results, taking necessary corrective actions and go back to the drawing board and start planning back. These continuous process will go on and on. Boring right? But this is control. You are the master of your own process.

cost accounting vs management accounting

Discuss the advantages and limitations of cost accounting in class. I want you to explore, read, there are a lot in the web.

Potential marks