Costing Fundamentals

‫ادارة التكاليف – الجزء الثاني‬

Data Collected By: Hamed Ali Mohamed
 Part One

Process-Costing
Systems

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 Process costing

Characteristics
Identical units
Continuous flow production
Never “complete”
Move from process (or department) to process
Costs are accumulated by process for a time
period
Allocated to “equivalent units” of output
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 Equivalent units

Amount of finished units that could have

been completed, given the materials or
effort involved
Three units started into production
One is completed
One is ¾ completed
One is ¼ completed
Two equivalent units are produced (1 + ¾ +
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 Equivalent units

May have different number of equivalent units

for materials, labor and overhead
Using the previous example, assume
all materials are added at the beginning
1 + 1 + 1 = 3 equivalent units for materials
conversion costs are added throughout the
process
1 + ¾ + ¼ = 2 equivalent units for conversion
costs

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 Equivalent units

 Try this one

 At the beginning of the period
5 units, each ½ complete, are in process
 During the period
27 more units are put into production
 At the end of the period
6 units, each ¾ complete, are still in process
 How many equivalent units were produced?

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 The process

Step 1 – Summarize flow of physical units

How many were in beginning inventory?
How many were started?
How many are still in ending inventory?

Step 2 – Calculate equivalent units

Beginning inventory was completed
Of the units started
Some were completed
Some are in ending inventory
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 The process

Step 3 – Summarize costs to be accounted

for
Cost in beginning inventory
Cost added during the period

Step 4 – Calculate cost per equivalent unit

Step 5 – Assign costs to completed units
and ending inventory

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 Production cost report

Part 1 – Units
Summary of physical and equivalent units
Where did they come from?
Where did they go?
Part 2 – Costs
Summary of costs
Calculation of cost per equivalent units
Assignment of costs
Transferred out
Work in process
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 (Step 2)
(Step 1) Equivalent units
Physical Direct Conversion
Flow of units units materials costs
Units to be accounted for:
Beginning work in process inventory
Units started this period
Total units to be accounted for -

Units accounted for: (Step 3)

Completed and transferred out
In ending work in process inventory
Total units accounted for - - -

Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory
Cost added in current period
Total costs to be accounted for $ - $ - $ -

Cost per equivalent unit (Step 4)

Costs accounted for: (Step 5)

Cost assigned to units transferred out
Cost in ending work in process inventory
Total costs accounted for $ -

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 Example 1

No beginning inventory

18,000 units started
2,000 in ending work in process inventory
40% complete as to materials
30% complete as to conversion cost
Current period costs
Materials - $45,360
Conversion costs - $68,060

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 (Step 2)
(Step 1) Equivalent units
Physical Direct Conversion
Flow of units units materials costs
Units to be accounted for:
Beginning work in process inventory -
Units started this period 18,000
Total units to be accounted for 18,000

Units accounted for: (Step 3)

Completed and transferred out 16,000 16,000 16,000
In ending work in process inventory 2,000 800 600
Total units accounted for 18,000 16,800 16,600

Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory $ - $ - $ -
Cost added in current period 113,420 45,360 68,060
Total costs to be accounted for $ 113,420 $ 45,360 $ 68,060

Cost per equivalent unit (Step 4) $ 2.70 $ 4.10

Costs accounted for: (Step 5)

Cost assigned to units transferred out $ 108,800 $ 43,200 $ 65,600
Cost in ending work in process inventory 4,620 2,160 2,460
Total costs accounted for $ 113,420 $ 45,360 $ 68,060

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 Example 2
 Beginning and ending inventories
 4,000 units in beginning work in process
80% complete as to materials
50% complete as to conversion costs
 25,000 units started
 3,000 units in ending work in process
60% complete as to materials
50% complete as to conversion costs
 Costs
Materials: Beg. WIP - $7,040, current - $51,660
Conversion: Beg. WIP - $1,500, current - $20,400

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 (Step 2)
(Step 1) Equivalent units
Physical Direct Conversion
Flow of units units materials costs
Units to be accounted for:
Beginning work in process inventory 4,000
Units started this period 25,000
Total units to be accounted for 29,000

Units accounted for: (Step 3)

Completed and transferred out 26,000 26,000 26,000
In ending work in process inventory 3,000 1,800 1,500
Total units accounted for 29,000 27,800 27,500

Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory $ 8,320 $ 6,720 $ 1,600
Cost added in current period 72,060 51,660 20,400
Total costs to be accounted for $ 80,380 $ 58,380 $ 22,000

Cost per equivalent unit (Step 4) $ 2.10 $ 0.80

Costs accounted for: (Step 5)

Cost assigned to units transferred out $ 75,400 $ 54,600 $ 20,800
Cost in ending work in process inventory 4,980 3,780 1,200
Total costs accounted for $ 80,380 $ 58,380 $ 22,000
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 Example 3

 Costs transferred from prior department

 Units and costs transferred out of previous department
(example 2) to department 2
Cumulative costs from prior department are treated
as a separate cost category in current department
Units are 100% complete as to prior department
Transferred-in units are the “units started” in the
current department

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 Example 3

 In department 2
1,000 units in beginning work in process
70% complete as to materials
60% complete as to conversion costs
2,000 units in ending work in process
30% complete as to materials
20% complete as to conversion costs
Costs
Materials: Beg. WIP - $420, current - $14,940
Conversion: Beg. WIP - $840, current - $34,720

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 (Step 2)
(Step 1) Equivalent units
Physical Prior Direct Conversion
Flow of units units department materials costs
Units to be accounted for:
Beginning work in process inventory 1,000
Units started this period 26,000
Total units to be accounted for 27,000

Units accounted for: (Step 3)

Completed and transferred out 25,000 25,000 25,000 25,000
In ending work in process inventory 2,000 2,000 600 400
Total units accounted for 27,000 27,000 25,600 25,400

Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory $ 3,890 $ 2,630 $ 420 $ 840
Cost added in current period $ 125,060 75,400 14,940 34,720
Total costs to be accounted for $ 128,950 $ 78,030 $ 15,360 $ 35,560

Cost per equivalent unit (Step 4) $ 2.89 $ 0.60 $ 1.40

Costs accounted for: (Step 5)

Cost assigned to units transferred out $ 122,250 $ 72,250 $ 15,000 $ 35,000
Cost in ending work in process inventory 6,700 5,780 360 560
Total costs accounted for $ 128,950 $ 78,030 $ 15,360 $ 35,560

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 First-in, first-out method

Previous examples used weighted average

method
Costs in beginning inventory were combined
with current period costs

First-in, first-out method separates the two

Assumes units in beginning inventory were
finished first

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 First-in, first-out method

Equivalent unit calculation includes

Work done to complete the units in beginning
inventory
Work done on new units started
100% for those started and completed
<100% for those started but not completed

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 First-in, first-out method

 Beginning inventory costs are only assigned to

units in beginning inventory
 Some current period costs are added to complete them
 Units started are only assigned current period
costs
 Costs accounted for includes
 Beginning inventory cost transferred out
 Current costs added to complete beginning inventory
 Current costs of units started and completed
 Current costs in ending inventory

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 First-in, first-out method

 Example 2 using FIFO method

 4,000 units in beginning work in process
 80% complete as to materials
 50% complete as to conversion costs
 25,000 units started
 3,000 units in ending work in process
 60% complete as to materials
 50% complete as to conversion costs
 Costs
 Materials: Beg. WIP - $7,040, current - $51,660
 Conversion: Beg. WIP - $1,500, current - $20,400
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 Example 2 - FIFO

(Step 2)
(Step 1) Equivalent units
Physical Direct Conversion
Flow of units units materials costs
Units to be accounted for:
Beginning work in process inventory 4,000
Units started this period 25,000
Total units to be accounted for 29,000

Units accounted for: (Step 3)

Beginning inventory completed 4,000 800 2,000
Started and transferred out 22,000 22,000 22,000
Total units transferred out 26,000 22,800 24,000
In ending work in process inventory 3,000 1,800 1,500
Total units accounted for 29,000 24,600 25,500

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 Example 2 - FIFO

Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory $ 8,540 $ 7,040 $ 1,500
Cost added in current period 72,060 51,660 20,400
Total costs to be accounted for $ 80,600 $ 58,700 $ 21,900

Cost per equivalent unit (Step 4) (Current period

costs / equivalent units) $ 2.1000 $ 0.8000

Costs accounted for: (Step 5)

Cost from beginning inventory transferred out $ 8,540 $ 7,040 $ 1,500
Cost to complete beginning inventory 3,280 1,680 1,600
Total cost for beginning inventory $ 11,820 $ 8,720 $ 3,100
Cost assigned to units started and completed 63,800 46,200 17,600
Total cost of units transferred out $ 75,620 $ 54,920 $ 20,700
Cost in ending work in process inventory 4,980 3,780 1,200
Total costs accounted for $ 80,600 $ 58,700 $ 21,900

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 Accounting for spoilage

Spoiled units have incurred some cost but

are not transferred to the next stage
Treated as a separate line item for
Units accounted for
Equivalent units

Costs accounted for

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 Accounting for spoilage

 Example 2 with spoilage

 4,000 units in beginning work in process
 80% complete as to materials, 50% as to conversion costs
 25,000 units started
 800 units spoiled
 50% complete as to materials, 30% as to conversion costs
 2,200 units in ending work in process
 60% complete as to materials, 50% as to conversion costs
 Costs
 Materials: Beg. WIP - $7,040, current - $51,660
 Conversion: Beg. WIP - $1,500, current - $20,400

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 (Step 2)
(Step 1) Equivalent units
Physical Direct Conversion
Flow of units units materials costs
Units to be accounted for:
Beginning work in process inventory 4,000
Units started this period 25,000
Total units to be accounted for 29,000

Units accounted for: (Step 3)

Completed and transferred out 26,000 26,000 26,000
Spoiled units 800 400 240
In ending work in process inventory 2,200 1,320 1,100
Total units accounted for 29,000 27,720 27,340

Flow of costs
Costs to be accounted for:
Cost in beginning work in process inventory $ 8,540 $ 7,040 $ 1,500
Cost added in current period 72,060 51,660 20,400
Total costs to be accounted for $ 80,600 $ 58,700 $ 21,900

Cost per equivalent unit (Step 4) $ 2.1176 $ 0.8010

Costs accounted for: (Step 5)

Cost assigned to units transferred out $ 75,884 $ 55,058 $ 20,827
Cost assigned to spoiled units $ 1,039 $ 847 $ 192
Cost in ending work in process inventory 3,676 2,795 881
Total costs accounted for $ 80,600 $ 58,700 $ 21,900

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 Journal entries

Same as for job-order costing

Dollar value of units transferred out
represents the cost moving from WIP to
the next stage in the process
Another WIP account (department)
Finished goods inventory
Dollar value of spoiled goods is debited to
an expense account
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 Operation costing

Hybrid of job-order and process-costing

Products goes through a combination of
common processes and individual
processes
No special accounting required
Units may be transferred out of a process to
become a separate job or vice-versa

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 Chapter 3: Process Costing

Chapter Themes: Learning Objectives:

 Inventories are still very 1. Describe how products flow
through departments and how
important. costs flow through accounts.
 Think about how costs 2. Discuss the concept of an
can be attached to large equivalent unit.
numbers of homogeneous 3. Calculate the cost per equivalent
products. unit.
4. Calculate the cost of goods
 Compare and contrast completed and the ending Work in
Job-Order and Process Process balance in a processing
Cost systems. department.
5. Describe a production cost report.

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 Product Cost Flows

Just as a product passes Related Learning Objectives:

through several departments 1. Describe how products flow
prior to completion, costs flow through departments and how
costs flow through accounts.
through several accounts
2. Discuss the concept of an
before the product is recorded equivalent unit.
in finished goods. 3. Calculate the cost per equivalent
unit.
4. Calculate the cost of goods
completed and the ending Work in
Process balance in a processing
department.
5. Describe a production cost report.

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Product Flows Through Departments

Products typically flow Related Learning Objectives:

through two or more 1. Describe how products flow
departments. Materials, labor through departments and how
costs flow through accounts.
and overhead are added in
2. Discuss the concept of an
each department. Material is equivalent unit.
often added at the beginning 3. Calculate the cost per equivalent
of the process. Labor and unit.
Overhead are often grouped 4. Calculate the cost of goods
together and added uniformly completed and the ending Work in
throughout the process. Process balance in a processing
department.
Recall that Labor and
5. Describe a production cost report.
Overhead are referred to as
conversion costs.

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 Cost Flows Through Accounts

In addition to materials, labor Related Learning Objectives:

and overhead, a processing 1. Describe how products flow
department may have a cost through departments and how
costs flow through accounts.
called transferred-in cost. This
2. Discuss the concept of an
cost is incurred in one equivalent unit.
department and then 3. Calculate the cost per equivalent
transferred to the next. And it unit.
is treated like any other 4. Calculate the cost of goods
manufacturing cost (material, completed and the ending Work in
labor, overhead) with respect Process balance in a processing
department.
to that department.
5. Describe a production cost report.

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 Calculating Unit Cost

Process Costing is essentially Related Learning Objectives:

a system of averaging. 1. Describe how products flow
Specifically, manufacturing through departments and how
costs flow through accounts.
costs incurred during a
2. Discuss the concept of an
specific time period are equivalent unit.
divided by a number called 3. Calculate the cost per equivalent
equivalent units to calculate unit.
an average unit cost. 4. Calculate the cost of goods
completed and the ending Work in
Process balance in a processing
department.
5. Describe a production cost report.

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 Equivalent Units

In calculating unit cost, it is Related Learning Objectives:

necessary to compute 1. Describe how products flow
equivalent units. When through departments and how
costs flow through accounts.
partially completed units are
2. Discuss the concept of an
converted to whole units they equivalent unit.
are referred to as equivalent 3. Calculate the cost per equivalent
units. A good analogy is the unit.
concept of a full-time 4. Calculate the cost of goods
equivalent (FTE) employee. 6 completed and the ending Work in
half-time (20 hours per week) Process balance in a processing
department.
employees make 3 full-time
5. Describe a production cost report.
equivalents.

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 Cost Per Equivalent Unit

The average unit cost in a Related Learning Objectives:

process costing system is 1. Describe how products flow
referred to as a cost per through departments and how
costs flow through accounts.
equivalent unit. The formula is
2. Discuss the concept of an
as follows: Cost per equivalent unit.
equivalent unit = (Cost in 3. Calculate the cost per
beginning WIP + Cost incurred equivalent unit.
in current period)/(Units 4. Calculate the cost of goods
completed + Equivalent units completed and the ending Work in
in ending WIP). Process balance in a processing
department.
5. Describe a production cost report.

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 Calculating and Applying Cost per
Equivalent Unit: Mixing Department
Example
See if you can calculate cost Related Learning Objectives:
per equivalent unit based on 1. Describe how products flow
through departments and how
the following information in costs flow through accounts.
the Mixing Department. 2. Discuss the concept of an
equivalent unit.
Unit Information:
3. Calculate the cost per equivalent
Beginning WIP 10,000 gallons, unit.
80% complete with respect to 4. Calculate the cost of goods
completed and the ending Work
labor and overhead. 70,000 in Process balance in a
gallons started and 60,000 processing department.
completed. Ending WIP 20,000 5. Describe a production cost report.
gallons 50% complete.
More

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 Calculating and Applying Cost per
Equivalent Unit: Mixing Department
Example
Cost Information: Related Learning Objectives:
1. Describe how products flow
Beginning WIP $18,000 through departments and how
materials, $7,800 labor and costs flow through accounts.
$23,400 overhead. During the 2. Discuss the concept of an
equivalent unit.
month $142,000 of material
3. Calculate the cost per equivalent
cost and $62,200 of labor cost unit.
was added. Overhead is 4. Calculate the cost of goods
applied at a predetermined completed and the ending Work
in Process balance in a
rate of $3 per dollar of labor or processing department.
$186,600. See the next slide 5. Describe a production cost report.
for the solution.
More

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 Calculating and Applying Cost per
Equivalent Unit: Mixing Department
Example (solution)
$6 per unit. Related Learning Objectives:
1. Describe how products flow
through departments and how
costs flow through accounts.
2. Discuss the concept of an
equivalent unit.
3. Calculate the cost per equivalent
unit.
4. Calculate the cost of goods
completed and the ending Work
in Process balance in a
processing department.
5. Describe a production cost report.

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 Production Cost Report

A Production Cost Report is Related Learning Objectives:

an end-of-the-month report for 1. Describe how products flow
a process costing system that through departments and how
costs flow through accounts.
provides a reconciliation of
2. Discuss the concept of an
units and a reconciliation of equivalent unit.
costs as well as details of the 3. Calculate the cost per equivalent
cost per equivalent unit unit.
calculations. 4. Calculate the cost of goods
completed and the ending Work in
Process balance in a processing
department.
5. Describe a production cost
report.

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 Reconciliation of Units

Assuming no units are lost Related Learning Objectives:

due to shrinkage, the number 1. Describe how products flow
of units in beginning WIP plus through departments and how
costs flow through accounts.
the number of units started
2. Discuss the concept of an
should be equal to the number equivalent unit.
of units completed plus the 3. Calculate the cost per equivalent
number of units left in ending unit.
WIP. [Inventory is very 4. Calculate the cost of goods
important.] completed and the ending Work in
Process balance in a processing
department.
5. Describe a production cost
report.

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 Reconciliation of Costs

For each period, the total cost Related Learning Objectives:

that must be accounted for is 1. Describe how products flow
the sum of the costs in through departments and how
costs flow through accounts.
beginning WIP plus costs
2. Discuss the concept of an
incurred during the period. equivalent unit.
This sum must be equal to the 3. Calculate the cost per equivalent
costs transferred out plus unit.
whatever cost is left over in 4. Calculate the cost of goods
ending WIP. completed and the ending Work in
Process balance in a processing
department.
5. Describe a production cost
report.

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 Basic Steps in Process Costing: A
Summary
1. Account for the number Related Learning Objectives:
of equivalent units. 1. Describe how products flow
through departments and how
2. Calculate the cost per costs flow through accounts.
equivalent unit for 2. Discuss the concept of an
material, labor and equivalent unit.
overhead. 3. Calculate the cost per
3. Assign cost to items equivalent unit.
completed and items in 4. Calculate the cost of goods
completed and the ending Work
ending WIP. in Process balance in a
4. Account for the amount processing department.
of product cost. 5. Describe a production cost
report.

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 Part two

Managerial Accounting

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 Difference Between Job-Order
and Process Costing Systems

Job-Order Costing Systems assign costs to

heterogeneous jobs.

Process Costing Systems spread total

manufacturing costs over total, homogenous, units
produced.

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 Difference Between Job-Order
and Process Costing Systems

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 Product and Cost Flows

1. Product Flows Through Departments

2. Cost Flows Through Accounts
3. Conversion Costs

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 Product Flows Through
Departments

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 Cost Flows Through Accounts

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 Calculating Unit Cost

To compute unit costs it is first necessary to compute

Equivalent Units.

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 How Equivalent Units are
Calculated

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 Cost Per Equivalent Unit

Average unit cost in a Process Costing System is

calculated as follows:

Cost Per Equivalent Unit =

Cost in BWIP + Costs incurred currently

Units completed + Equivalent units in EWIP

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 Calculating and Applying Cost Per
Equivalent Unit: Mixing Department Example

Units:
BWIP:10,000 gallons, 80% complete labor/overhead
Started:70,000 gallons, 60,000 completed
EWIP:20,000 gallons, 50% complete.
Costs:
BWIP:$18,000 material, $7,800 labor, $23,400 overhead
Added:$142,000 of material, $62,200 labor
Overhead: applied at a predetermined rate of $3 per dollar of
labor or $186,600.

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 Calculating and Applying Cost
Per Equivalent Unit: Mixing
Department
Calculate: Example
Cost per equivalent unit.
Answer: $6
Solution:
Material: $160,000/80,000=$2
Labor: $ 70,000/70,000=$1
Overhead: $210,000/70,000=$2
Total Costs/Unit: =$6

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 Calculating and Applying Cost Per
Equivalent Unit: Mixing Department Example

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 Calculating and Applying Cost Per
Equivalent Unit: Mixing Department
Example

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 Calculating and Applying Cost Per
Equivalent Unit: Mixing Department Example

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 Production Cost Report

Production Cost Report Contains:

1. Reconciliation of units.
2. Reconciliation of costs.
3. Details of the cost per equivalent unit calculations.

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 Reconciliation of Units
BWIP + the number of units started = the
number of units completed EWIP.

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 Reconciliation of Costs
BWIP + costs added = costs transferred
out + EWIP.

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Basic Steps in Process Costing: A
Summary
1. Account for the number of physical units.
2. Calculate the cost per equivalent unit for
material, labor and overhead.
3. Assign cost to items completed and items in
EWIP.
4. Account for the amount of product cost.

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Dealing With Transferred-In Costs
1. Process Costing Systems generally use
several processes; not just one.
2. Transferred-In costs are treated just like other
product costs (l.e. material, labor and
overhead).
3. Ultimately all costs, including those transferred
in, are transferred to Finished Goods.

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Process Costing and Incremental
Analysis
1. Decisions are based on costing information
obtained through Process Costing Systems.
2. Incremental Analysis is frequently used to
make these decisions.
3. Be wary and recall that Process Costing
Systems capture both fixed and variable costs.

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 Differential Analysis
Differential analysis is used for analyzing:
 Leasing or selling equipment.
 Discontinuing an unprofitable segment.
 Manufacturing or purchasing a needed part.
 Replacing usable fixed assets.
 Processing further or selling an intermediate
product.
 Accepting additional business at a special price.

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 Differential Analysis

Differential
Decisions Analysis
Alternative A Differential revenue
or – Differential costs

Alternative B Differential income or loss

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 Discontinue
a Segment
or Product

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 Battle Creek Cereal Co.
Condensed Income Statement
For the Year Ended August 31, 2006
Differential items Bran Other
Flakes Cereals Total
Sales
Sales $100,000
$100,000 $900,000 $1,000,000
Cost of goods sold:
Variablecost
Variable costs $ 60,000
60,000 $420,000 $ 480,000
Fixed costs 20,000 200,000 220,000
Total cost of goods sold $ 80,000 $620,000 $ 700,000
Gross profit $ 20,000 $280,000 $ 300,000
Operating expenses:
Variableexpenses
Variable expenses $ 25,000
25,000 $155,000 $ 180,000
Fixed expenses 6,000 45,000 51,000
Total operating expenses $ 31,000 $200,000 $ 231,000
Income (loss) from operations $ (11,000) $ 80,000 $ 69,000

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 Battle Creek Cereal Co.
Condensed Income Statement
For the Year Ended August 31, 2006
Differential items Bran Other
Flakes Cereals Total
Sales $100,000 $900,000 $1,000,000
Cost of goods sold:
Variablecost
Variable costs $$ 60,000
60,000 $420,000 $ 480,000
Fixed costs 20,000 200,000 220,000
Total cost of goods sold $ 80,000 $620,000 $ 700,000
Gross profit $ 20,000 $280,000 $ 300,000
Operating expenses:
Variableexpenses
Variable expenses $$ 25,000
25,000 $155,000 $ 180,000
Fixed expenses 6,000 45,000 51,000
Total operating expenses $ 31,000 $200,000 $ 231,000
Income (loss) from operations $ (11,000) $ 80,000 $ 69,000

7/23/2022
Hamed Ali 1-67
@Hamed.Ali.Mohamed2@gmail.com
 Proposal to Discontinue Bran Flakes
September 29, 2006
Differential revenue from annual sales
of Bran Flakes:
Revenue from sales $100,000
Differential cost of annual sales of Brian Flakes:
Variable cost goods sold $60,000
Variable operating expenses 25,000 85,000
Annual differential income from sales of
Bran Flakes $15,000

Continue!
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 or

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 Currently, a firm manufactures the dashboards that it
uses in making automobiles. The cost of manufacturing
this part is summarized below. An outside supplier has
offered to provide the part for $240. Should the car
manufacturer accept the offer?

Direct materials $ 80
Direct labor 80
Variable factory overhead 52
Fixed factory overhead 68
Total cost per unit $280

INITIAL REACTION—DON’T MAKE

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 Proposal to Manufacture Automobile Part
February 15, 2006
Purchase price of part $240.00
Differential cost to manufacture:
Direct materials $80.00
Direct labor 80.00
Variable factory overhead 52.00 212.00
Cost savings from manufacturing part $ 28.00

The fixed factory overhead is excluded

because it is not relevant—so continue
making the part.
7/23/2022
Hamed Ali
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 Replace or Keep
Equipment

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 Assume that a business is considering the disposal of
several identical machines having a total book value of
$100,000 and an estimated remaining life of five years.
The old machines can be sold for $25,000. They can be
replaced by a single high-speed machine at a cost
$250,000. The new machine has a n estimated useful life
of five years and no residual value. Analyses indicate an
estimated annual reduction in variable manufacturing costs
from $225,000 with the old machine to $150,000 with the
new machine. No other changes in the manufacturing
costs or the operating expenses are expected. Should the
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machine be purchased? 1-73
 Proposal to Replace Equipment
November 28, 2006
Annual variable costs—present equipment $225,000
Annual variable costs—new equipment 150,000
Annual differential decrease in cost $ 75,000
Number of years applicable x5
Total differential decrease in cost $375,000
Proceeds from sale of present equipment 5,000 $400,000
Cost of new equipment 250,000
Net differential decrease in cost, 5-years $150,000
Annual net differential—new equipment $ 30,000

Buy the new equipment!

7/23/2022 Hamed Ali
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 Process or Sell

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 Proposal to Process Kerosene Further
October 1, 2006
Differential revenue from further processing
per batch:
Revenue from sale of gasoline [(4,000 gallons –
800 gallons evaporation) x $1.25] $4,000
Revenue from sale of kerosene (4,000 gallons
x $0.80) 3,200
Differential revenue $800
Differential cost per batch:
Additional cost of producing gasoline 650
Differential income from further processing
gasoline per batch $150
Process further!
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 Accept
Business at a
Special Price

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 The monthly capacity of a sporting goods
business is 12,500 basketballs. Current sales and
production are averaging 10,000 basketballs per
month. The current manufacturing cost is $20
(variable, $12.50; fixed, $7.50). The domestic
selling price is $30.

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 The manufacturer receives an offer from an
exporter for 5,000 basketballs at $18 each.
Production can be spread over three months, so
these basketballs can be manufactured using
normal capacity. Domestic sales would not be
affected.

Should the offer be accepted or rejected?

Hamed Ali 1-79

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 Proposal to Sell Basketballs to Exporter
March 10, 2006
Differential revenue from accepting offer:
Revenue from sale of 5,000 additional units at $18 $90,000
Differential cost of accepting offer:
Variable cost of 5,000 additional units at $12.50 62,500
Differential income from accepting offer $27,500

Accept the offer!

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 Part Three

Setting Normal
Product Selling Prices

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Setting Normal Product Selling Prices

Market Methods
1. Demand-based methods
2. Competition-based methods

Cost-Plus Methods
1. Total cost concept
2. Product cost concept
3. Variable cost concept
Hamed Ali
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 Market Methods

Demand-based methods set

the price according to the
demand for the product.

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 Market Methods

Competition-based methods set

the price according to the price
offered by the competitors.

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 Total Cost Concept

Using the Total cost concept,

all cost of manufacturing a
product...

Manufacturing
Cost

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 Total Cost Concept

…plus the selling and

administrative expenses...

Administrative
Expenses

Selling Expenses

Manufacturing
Cost

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 Total Cost Concept

…are included in the cost to

which the markup is added.
Desired Profit
Administrative
Expenses

Selling Expenses
Total cost

Manufacturing
Cost

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 Total Cost Concept
The company’s
desired profit is
Desired $160,000.
selling price
Desired Profit
Administrative
Expenses

Selling Expenses

Manufacturing
Cost

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 Total Cost Concept
Cost Structure Example (100,000 units)
Per Unit Total
Variable Costs (per unit): Cost Cost
Direct materials $ 3.00 $ 300,000
Direct labor 10.00 1,000,000
Factory overhead 1.50 150,000
Selling and administrative 1.50 150,000
Total variable costs $16.00 $1,600,000
Fixed Costs:
Factory overhead .50 50,000
Selling and administrative .20 20,000
Total fixed costs . 70 70,000
Total costs $16.70 $1,670,000
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 Total Cost Concept
Markup Percentage:
Desired profit = $160,000
= 9.6%
Total costs $1,670,000
Total cost per calculator $16.70
Markup ($16.70 x 9.6%) 1.60
Selling price $18.30

Only the desired profit is

covered in the markup.
Hamed Ali
1-90
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 Total Cost Concept
Proof that a sale of 100,000 computers at $18.30
each will generate a desired profit of $160,000.
Digital Solutions Inc.
Income Statement
For the Year Ended December 31, 2006
Sales (100,000 units x $18.30) $1,830,000
Expenses:
Variable (100,000 units x $16.00)$1,600,000
Fixed ($50,000 + $20,000) 70,000 1,670,000
Income from operations $ 160,000

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 Product Cost Concept

Using the product cost concept only the

manufacturing costs are included in the
amount to which the markup is applied.

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 Product Cost Concept
Cost Structure Example (100,000 units)
Per Unit Total
Variable Costs: Cost Cost
Direct materials $ 3.00 $ 300,000
Direct labor 10.00 1,000,000

@Hamed.Ali.Mohamed2@gmail.com
Factory overhead 1.50 150,000
Selling and administrative 1.50 150,000
Total variable costs $16.00 $1,600,000

Hamed Ali
Fixed Costs:
Factory overhead .50 50,000
Selling and administrative .20 20,000
Total fixed costs .70 70,000
Total costs $16.70 $1,670,000

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Product Cost = $15 per unit 1-93
 Product Cost Concept

Administrative
Expense
+ Markup
Selling Expense
+
Desired Profit
Manufacturing Product Cost
Cost

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 Product Cost Concept

Total selling and

Markup Desired profit + administrative expenses
=
percentage Total manufacturing costs

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 Product Cost Concept

Markup = $160,000 + $170,000

percentage $1,500,000

Markup
= 22%
percentage
DM ($3 x 100,000) $ 300,000
DL ($10 x 100,000) 1,000,000
Factory overhead:
Variable ($1.50 x 100,000) 150,000
Fixed 50,000
Total manufacturing costs $1,500,000
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 Product Cost Concept

Manufacturing cost per calculator $15.00

Markup ($15 x 22%) 3.30
Selling price $18.30

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 Variable Cost Concept
The variable cost concept uses total of the
variable manufacturing costs and the variable
selling and administrative expenses as the
amount to apply a markup.

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 Variable Cost Concept

Total Fixed Markup

Costs +
Desired
Profit

Variable
Manufacturing
Cost Product Cost
+
Variable
Administrative
and Selling
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 Variable Cost Concept

Markup Desired profit + Total fixed costs

=
percentage Total variable costs

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 Variable Cost Concept

Markup $160,000 + $50,000 + $20,000

=
percentage $1,600,000
Markup
= 14.4%
percentage
Direct materials ($3 x 100,000) $ 300,000
Direct labor ($10 x 100,000) 1,000,000
Variable factory overhead
($1.50 x 100,000) 150,000
Variable selling and administrative
expenses ($1.50 x 100,000) 150,000
Total variable costs $1,600,000
1-101
7/23/2022
 Variable Cost Concept

Variable cost per calculator $16.00

Markup ($16 x 14.4%) 2.30
Selling price $18.30

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 Target Costing
Using target costing the cost is determined by
subtracting a desired profit from the selling price.
Present Market Price
Expected
Profit
Market Price
Profit
Required
Actual cost Target
Cost reduction Cost

Present Future
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 Part Four

Bottlenecks

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Product Profitability Under Production Bottlenecks
Small Medium Large
Wrench Wrench Wrench
Sales price $130 $140 $160
Variable cost 40 40 40
Contribution margin $ 90 $100 $120
Bottleneck hours 1 4 8

The number of heat treatment

hours per unit for each product.

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Product Profitability Under Production Bottlenecks
Small Medium Large
Wrench Wrench Wrench
Sales price $130 $140 $160
Variable cost 40 40 40
Contribution margin $ 90 $100 $120
Bottleneck hours ÷1 ÷4 ÷8
Bottleneck contribution $ 90 $ 25 $ 15

Largest contribution margin

per bottleneck hour
Hamed Ali 1-106
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Product Profitability Under Production Bottlenecks

How much should the firm charge

for the large wrench in order to
deliver the same contribution as
the small wrench?

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Product Profitability Under Production Bottlenecks

Contribution Revised price of Variable cost per

margin per large wrench – large wrench
bottleneck hour =
Bottleneck hours per large wrench
per small wrench
Revised price of

$90 =
large wrench – $40
8
$720 = Revised price of large wrench – $40
$760 = Revised price of large wrench
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Product Profitability Under Production Bottlenecks

Revised price of large wrench per formula

on the previous slide $760
Less: Variable cost per unit of large wrench 40
Contribution margin per unit of large wrench $720
Bottleneck hours per unit of large wrench ÷8
Revised contribution margin per bottleneck hour $ 90

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 Process Costing Cost Flow

Direct
Materials Cost of Process
Mfg.. Process
Traceable
Direct Unit Cost
Mfg.. Process
Labour for Finished
(Work-in-
Goods
Process)

Mfg..
Overhead Sequential Processing
or
Parallel Processing
Costs must be assigned using
an activity base and predetermined
overhead rate
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 Characteristics of Process Costing

• Homogeneous units pass through a series

of similar processes.
• Each unit in each process receives a similar
dose of manufacturing costs.
• Manufacturing costs are accumulated for a
process for a given period of time.
• Manufacturing cost flows and the
associated journal entries are generally
similar to job-order costing.
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 Characteristics of Process Costing
(Continued)

• The departmental production report is the

key document for tracking manufacturing
activity and costs.
• Unit costs are computed by dividing the
departmental costs of the period by the
output for the period.

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 The Concept of Equivalent Units

1,000 units - 20% materials added; 1,500 units - 1/3 materials added;
60% conversion costs added 50% conversion costs added

Units in Units in
BWIP Work in EWIP
Process
Units Units
Started Completed

10,000 units; 9,500 units

Units of Input = Units of Output

Units in BWIP + Units Started = Units in EWIP + Units Completed
1,000 + 10,000 = 1,500 + 9,500

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 The Concept of Equivalent Units
(Continued)

Equivalent Units Calculation:

Direct Materials Conversion Costs
Units Completed 9,500 9,500
Ending WIP 500 750
Total Units Processed *10,000 *10,250
Beg. WIP Inventory (200) (600)

Processed This Period **9,800 **9,650

*Equivalent units for weighted average (total units worked on)

** Equivalent units for FIFO (units worked on this period)

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 A Cost Analysis

1,500 units
1,000 units - $5,000 materials added;
$10,000 conversion costs added

Cost added Costs added

to BWIP Work in to EWIP
Process
Cost of Cost of Units
Units Started Completed

10,000 units; $23,000 9,500 units

mat’l added; $120,175
conversion cost added

Input Costs = Output Costs

$158,175 = $158,175

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 Steps For Costing out Production in
Process Costing

1. Analysis of the flow of Physical units

2. Calculation of equivalent units
3. Computation of unit cost
4. Valuation inventory
5. Cost reconciliation

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 Weighted Average Costing

Step 1- Inputs/Outputs in Units

Inputs: Outputs:
BWIP 1,000 EWIP 1,500
Started 10,000 Completed 9,500

Total 11,000 Total 11,000

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 Weighted Average Costing
(Continued)

Step 2 - Equivalent Units

Weighted Materials Conversion Costs
Average EWIP 500 750
Completed 9,500 9,500
Units Worked On 10,000 10,250
BWIP (200) (600)
Units This Period 9,800 9,650

FIFO

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 Weighted Average Costing
(Continued)

Step 3 - Unit Cost Calculation

BWIP Added This Period Total Unit Cost

Mat’l $ 5,000 $ 23,000 *$ 28,000 $ 2.80
C. Costs 10,000 120,175 *130,175 12.70
Total $15,000 $143,175 *$158,175 $15.50
Total Input Cost
*Divide total cost added to the system by the
weighted average equivalent units.

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 Weighted Average Costing
(Continued)

Step 4 Value of Goods Completed and EWIP

(Reconciliation of input and output costs)
Cost of Goods Transferred
9,500 x 15.50 = $147,250

EWIP
Materials 500 x $2.80 = $1,400
C. Cost 750 x $12.70 = $9,525 $ 10,925
Total $158,175
Total Output Cost
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 Nonuniform inputs: An illustrative example

Materials are added at the beginning of the process.

Units in process, May 1, 60% complete 2,000
Units completed and transferred out 10,000
Units in Process, May 31, 40% Complete 1,000

Costs:
BWIP Cost Added
Materials $300 $3,000
Conversion Costs 600 4,600

Step I - Physical Flow:

Units to account for Units accounted for
Units, BWIP 2,000 Units completed 10,000
Units started 9,000 Units, EWIP 1,000
Total 11,000 Total 11,000
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 Nonuniform inputs example cont’d
Step II - Equivalent Units (Weighted Average):
Material Conversion
Units completed 10,000 10,000
EWIP 1.000 400
Total equivalent 11,000 10,400

Step III - Unit Cost

Unit Cost = $3,300/11,000 + $5,200/10,400
= $0.30 (materials) + $0.50 (conversion)
= $0.80

Step IV - Valuation of Inventories

Goods transferred out
$0.80 X 10,000 = $8,000
EWIP: ($0.30 X 1,000) + ($0.50 X 400) = $500

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 Nonuniform inputs example cont’d

Step V - Cost Reconciliation

Costs assigned
Goods transferred $8,000
EWIP 500
8,500

Cost to account for

BWIP $ 900
Costs added 7,600

Total 8,500

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 FIFO Costing

Step 1- Inputs/Outputs in Units

Inputs: Outputs:
BWIP 1,000 EWIP 1,500
Started 10,000 Completed 9,500

Total 11,000 Total 11,000

*Step one is the same for weighted average and FIFO

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 FIFO Costing (Continued)

Step 2 - Equivalent Units

Weighted Materials Conversion Costs
Average EWIP 500 750
Completed 9,500 9,500
Units Worked On 10,000 10,250
BWIP (200) (600)
Units This Period 9,800 9,650

FIFO

*This step is the same for weighted average and FIFO

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 FIFO Costing (Continued)

Step 3 - Unit Cost Calculation

BWIP Added This Period Total Unit Cost

Mat’l $ 5,000 *$ 23,000 $ 28,000 $ 2.35
C. Costs 10,000 *120,175 130,175 12.45
Total $15,000 *$143,175 $158,175 $14.80
Total Input Cost
*Divide total cost added this period by the
equivalent units worked on this period (FIFO units).

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 FIFO Costing (Continued)

Step 4 - Value of Goods Completed and EWIP

(Short-cut method)

Total Input Costs = $158,175.00

Less: EWIP
Materials 500 x $2.35 = $1,175.00
C. Cost 750 x $12.45 = 9,337.50 10,512.50

Cost of Goods Completed $147,662.50

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 FIFO Costing (Continued)

Step 4a - Reconciliation of Costs

Beginning WIP
Added last period = $15,000
Added this period:
Materials 800 x $2.35 = $1,880
Conversion costs 400 x $12.45 = $4,980 $21,860

Started and Completed 8,500 x $14.80 125,800

Ending WIP
Materials 500 x $2.35 = $1,175
Conversion Costs 750 X $12.45 = 9,337.50 10,512.5

*$158,175

*Rounding error Total Output Cost

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 COST CLASSIFICATIONS
Functional

Product
Marketing
R&D
Admin

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 COST CLASSIFICATIONS
Functional – Product Detail

Product
Marketing
Mfg. R&D
Overhead Admin
Materials

Labor Prime costs = Dir. Materials + Dir. Labor

Conversion costs = Dir. Labor + Total Mfg.

Overhead

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 COST CLASSIFICATIONS
Behavioral

Variable

Product
Marketing
R&D
Admin

Fixed

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 COST CLASSIFICATIONS
Responsibility

Variable

A
Product
Marketing
R&D
C Admin
B

Fixed

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 COST RELATIONSHIPS: MANUFACTURING COMPANY
PRIOR
PERIOD

Fin Goods
WIP (Beg)
(Beg)
Direct Mat.
(Beg)
Direct Mat.
Used + +
+
+
Direct Mat. Direct labor Tot. Mfg. Costs Cost of Goods Cost of Goods
Purchases incurred incurred Mfg. Sold

- +
- -
Overhead costs
Direct Mat. applied
(End)
Fin Goods
WIP (End) (End)

NEXT
Hamed Ali PERIOD
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 Income Statement
Manufacturing Company

$4,000,000 Beg. WIP

Sales Beg. Fin. Goods + Direct Mat’l
+ Used
- $2,400,000 + Direct Labor
$2,600,000 + Mfg. Overhead
Cost of Goods Mfg.
Cost of Goods Sold - End. WIP
= -
End. Finished Goods
=
$1,400,000 = Cost of Goods Mfg.
Gross Margin $2,600,000
- Cost of Goods Sold
$900,000
Other Oper.Expenses
• Selling expenses
=
$500,000 • Admin. expenses
Net Income • Income taxes
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 INCOME STATEMENT
Service Organization
$4,000,000
Sales
-
$2,600,000
Cost of Services • Direct Materials/ Supplies
= • Direct Labor
• Indirect Costs or Overhead
$1,400,000
Gross Margin
-
$900,000 • Selling Expenses
Operating Expenses • Administrative Expenses
= • Income taxes
$500,000
Net Income

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 Basic Cost Behavior Patterns

Total fixed costs do not respond to changes

in unit level cost drivers within a period.

Total
fixed
costs (Y)

0
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0 Total activity (X)
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 Fixed Costs

Committed fixed costs are

required to maintain the current
service or production capacity to fill
previous legal commitments.

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 Fixed Costs

Discretionary fixed costs are

set at a fixed amount each year at
the discretion of management.

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 Basic Cost Behavior Patterns

Total variable costs increase in proportion

to increases in unit level cost drivers.

Total
variable
costs (Y)

0
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0 Total activity (X)
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 Basic Cost Behavior Patterns

Total mixed costs contain fixed and variable

cost elements. They increase, but not in direct
proportion to increases in unit level cost drivers.

Total
mixed Sometimes
costs (Y) called
semivariable
costs
0
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0 Total activity (X)
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 Basic Cost Behavior Patterns

Total step costs are constant over a range of

activity for a unit level cost driver but moves to
a different amount at different ranges.

Total
step
costs (Y)

0
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0 Total activity (X)
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 Basic Cost Behavior Patterns

Pizza Hut

• Variable costs--The cost of the

ingredients used to make the pizzas
• Fixed costs--Depreciation, property taxes,
and property insurance
• Mixed costs--Cost of electricity
• Step costs--Employee wages
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 Total Cost Behavior With A Single
Unit Level Cost Driver

Slope, Y Variable costs are

layered on top of fixed
b= X costs.

Total Total costs

costs Y = a + bX
(Y) Variable costs (b)

Fixed costs (a)

0
0 Value of independent variable (X)
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 Equation for Total Costs

Y = a + bX
slope (an
approximation of
total costs
variable costs per unit
vertical axis intercept of X) value of
(an approximation of independent
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variable
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 Methods for Separating Mixed Cost
Into Fixed and Variable Components

• Scatterplot Method
• The High-Low Method
• Specific quantitative methods
– The Method of Least Squares

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 Mixed Costs: An Example

Month Utility Costs Unit Produced

January $2,000 200
February 2,500 400
March 4,500 600
April 5,000 800
May 7,500 1,000

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 Utility
Cost Scatterplot Method
$8,000

Important: Cost function is only

.
relevant within relevant range
6,000
.
4,000
. Analyst can fit line
. based on his or her
experience
2,000 .
0
200 400 600 800 1,000
Units Produced

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 High-Low Cost Estimation
Number of Packaging
Shipments Costs
Low activity period January 6,000 $17,000
February 9,000 26,000
High activity period March 12,000 32,000
April l0,000 20,000
Variable cost Difference in total costs
per unit (b) = Difference in activity
Continued on next
slide b = $32,000 - $17,000
12,000 - 6,000
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 High-Low Cost Estimation
Variable cost
= $2.50
per unit (b)
January
a = Total costs - Variable costs
$17,000 = a + ($2.50 x 6,000 shipments)
a = $2,000
March
Same answer!
$32,000 = a + ($2.50 x 12,000 shipments)
a = $2,000
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 High-Low Cost Estimation

Y = $2,000 x $2.50X

Total packing Number of

department costs shipments

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 Composition of
Manufacturing Costs
Direct materials, the cost of
primary raw materials converted
into finished goods. The word
“direct” indicates costs that are Manufacturing overhead includes all
easily or directly traced to a manufacturing costs other than direct
finished product or service. materials and direct labor.

Direct labor, the wages earned by

production employees for the time they
spend converting raw materials into
finished products.

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 Conventional Product Costing

Direct
Materials
Traceable

Direct Work in Finished

Labor Process Goods

Indirect Overhead to
be Assigned
?

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 Composition of
Manufacturing Costs

• Prime costs = Direct materials +

Direct labor

• Conversion costs = Direct labor +

Manufacturing overhead
(fixed & variable)

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 Changing Composition of
Total Manufacturing Costs
100

Manufacturing overhead has

increased
Percent of Total Total
Manufacturing manufacturing
Costs costs
Direct labor has decreased

Direct materials has increased

0
1900 1950 2000
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 The Basic Concept of
Overhead Application

Applied overhead = Overhead rate x Actual activity

Key considerations
• Applied overhead is the basis for computing per-unit
overhead cost

• Applied overhead is rarely equal to a period's actual

overhead costs.

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CONVENTIONAL PRODUCT COSTING
Overhead Application
Predetermined Total budgeted overhead
Overhead Rate = Expected level of activity *

• Conventional costing typically used volume (or a

surrogate for volume such as DLH)

• Problems
- Budgeted overhead contains both fixed and
variable costs

- Selection of expected level of activity

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 Select An Appropriate Activity
Base
Possible Measures of
Production Activity
Criterion:
Cause and Effect
Relationship
1. Units produced Choice of Activity
2. Direct labor Base to be Used
hours for Computing the
3. Direct labor dollars Predetermined
4. Machine hours Overhead Rate
5. Direct materials

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 Comparison of Traditional and
Contemporary Cost Management Systems

Traditional Contemporary
Cost
Information
System
1. Unit-based drivers 1. Uses of nonunit drivers
2. Allocation intensive 2. Tracing intensive
3. Narrow view of 3. Expanded product costing
product costs 4. Managing activities
4. Focus on cost mgt. 5. Detailed activity
5. Little activity information information
6. Maximizes unit 6. System-wide performance
production appraisals
7. Uses financial measures 7. Use of nonfinancial
of performance measures of performance

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 Part Five

Project Cost Management

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 What is Project Cost
Management?
• Project Cost Management includes the processes
involved in estimating, budgeting, and controlling
costs so that the project can be completed within
the approved budget..

• The major processes of Project Cost

Management include cost estimating, cost
budgeting , and cost control.

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 Project Cost management

Cost
Cost Budgeting
Estimation Cost
Control

Planning Monitoring and

control

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 Net Present Value (NPV) or (DCF)

This is the method of determining today’s value of

future money. It is the opposite of compounding,
which is the future value of today’s money.

Future Value Profit

NPV (DCF)= Total of
(1+Interest Rate) n

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 NPV Example

• A project of 100,000 initial investment with a

net cash flow of 25,000 per year for a period of
8 years, Required Rate (interest) is 15% and
inflation rate of 3% per year, the DCF or NPV
will be:

25,000
S (t=1:8) - 100,000 = 1939
(1+.15+.03)t

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 Project Selection Method
Term Indicates
•Present Value (PV) The value today of future cash flows

•Net Present Value (NPV) The sum of the present value of all income and
expenditures of a project. Greater than 0 is
good.

•Internal Rate of Return (IRR) The determination of the discount rate at the
point of NPV = 0.
•Payback Period The amount of time that will pass before the net
revenues = costs incurred.
•Benefit Cost Ratio (BCR) A comparison of revenue to costs. Greater than
1 is good.
•Opportunity Costs The loss of selecting one project vs. another.

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 Practice Exercise: Which Project
would you select?

Project A Project B Choice

NPV $ 95,000 $ 75,000 Project A

IRR 13 % 17 % Project B

Payback Period 16 months 21 months

Project A

Benefit : Cost ratio 2.79 1.3

Project A
BCR

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Life Cycle Costing VS. Value Engineering

• Life-Cycle Costing (LCC) is a technique to establish the cost

of a product or service system. It is a structured approach that
addresses all the cost of the product or service over its
anticipated life time. The results of an LCC analysis can be used
to assist management in the decision-making process.
– LCC = R&D costs + production cost + construction cost + operation
and maintenance cost + product retirement and phase-out cost.

• Value Engineering is a creative approach used to

optimize life-cycle costs, save time, increase profits, improve
quality, expand market share, solve problems, and/or use
resources more effectively.

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 COST ESTIMATING

Developing approximation of the

cost of resource needed to
complete the project activities

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 Types of Estimates and Degree of
Accuracy

Type Accuracy Project

Phase
Order of Magnitude -25% to +75% Initiation

(rough order of magnitude

(ROM))

Budget Estimate -10% to +25% Planning

Definitive Estimate -5% to +10% Planning

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 COST ESTIMATING

Inputs Tools & Techniques Outputs

1. Analogous
1. Enterprise
Estimating
Environmental
Factors 2. Determine Resource
Cost Rates 1. Activity Cost
2. Organizational Estimates
Process Assets 3. Bottom-up
Estimating 2. Activity Cost
3. Project Scope Estimate
4. Parametric
Statement Supporting Detail
Estimating
4. Work Breakdown 5. Project Management 3. Requested Changes
Structure Software 4. Cost Management
5. WBS Dictionary 6. Vendor Bid Analysis Plan (Updates) `
6. Project 7. Reserve Analysis
Management Plan Hamed Ali
8. Cost of Quality @Hamed.Ali.Mohamed2@gmail.com
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 Fundamentals of Cost Estimating
Cost vs. Price
• Cost Estimating is the determination of
approximately how much will it cost the
performing organization to provide the product or
service involved.

• Pricing is a business decision that determines

how much to charge for the product or service

Cost + profit = Price

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 Types of Costs
Exercise : Can you name examples from your project work of
the following most commonly used types of cost?
Type Description Examples
Fixed costs Project costs that remain constant regardless
of phase or output.
Variable costs Project costs that vary in relation to the
output.
Direct costs Costs that are directly attributable to the
project being estimated.
Indirect costs Costs that are attributable to more than one
project. Also known as overhead.

Cost reserves Amount of money needed above the estimate

to reduce risk of overruns of project
objectives to a level acceptable to the
organization.
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 Inputs to Cost Estimating

• Enterprise Environmental Factors

– Marketplace conditions
– Commercial databases
• Organizational Process Assets
– Cost estimating Policies, templates
– Historical information ,Project files, Lessons learned
• Project Scope Statement
• Work Breakdown Structure
• WBS Dictionary
• Project Management Plan

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 Inputs to Cost Estimating

• Project Management Plans:

– Schedule management plan.
– Staffing management plan
– Risk register

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 Tools of cost Estimation

1. Analogous (Top-Down) Estimating: uses the cost of a previous,

similar project as basis of estimating the cost of the current project.

2. Parametric Estimating: uses project characteristics (parameters) in

a mathematical model to predict project costs.

3. Bottom-up Estimating: Estimating the cost of individual work

items and then rolling up the costs to arrive at a project total.

4. Computerized Tools: can facilitate rapid consideration of costing

alternatives.

5. Other : Ex. vendor bid analysis. Determine resource cost rates,

Reserve Analysis, Cost of Quality

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 Outputs of Cost Estimating

• Activity Cost Estimates

– A quantitative assessment of the likely costs
of the resources required to complete
schedule activities.
• Activity Cost Estimate Supporting Detail
• Requested Changes
• Cost Management Plan (Updates)

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 • Q: Analogous estimating:
a. Uses bottom-up estimation techniques
b. Is used most frequently in the executing
phase of the project
c. Uses top-down estimation techniques
d. Uses actual detailed Historical costs

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 General Accounting Terms
• Opportunity Cost
– The opportunity given up by selecting one project over another.
NOTE: This does not require any calculation. See the example
below.

• Law of Diminishing Returns

– more you put into something, less you get out of it. For example,
adding twice as many resources to an activity may not get the
activity done in half the time.

• Working Capital
– Current assets minus current liabilities, or the amount of money
the company has available to invest, including investment in
projects.

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 COST BUDGETING

• Aggregating the estimated cost of

individual activities or work package to
establish a cost baseline

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 COST BUDGETING
Inputs Tools & Techniques Outputs

1. Project Scope
Statement
2. Work Breakdown
Structure
3. WBS Dictionary
1. Cost Aggregation 1. Cost Baseline
4. Activity Cost
Estimates 2. Reserve Analysis 2. Project Funding
3. Parametric Requirements
5. Activity Cost
Estimate Supporting Estimating 3. Cost Management
Detail 4. Funding Limit Plan (Updates)
6. Project Schedule Reconciliation 4. Requested Changes
7. Resource Calendars
8. Contract
9. Cost Management
Hamed Ali
Plan @Hamed.Ali.Mohamed2@gmail.com 1-179
 Inputs to Cost Budgeting

• Project Scope Statement

• Work Breakdown Structure
• WBS Dictionary
• Activity Cost Estimates
• Activity Cost Estimate Supporting Detail
• Project Schedule
• Resource Calendars
• Contract
• Cost Management Plan
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 Tools & Techniques for Cost
Budgeting
• Cost Aggregation
• Reserve Analysis
• Parametric Estimating
• Funding Limit Reconciliation

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 Parametric cost estimating involves:

a. Calculating individual cost estimates for each work

package.
b. Using rates and factors based on historical experience
to estimate costs.
c. Using the actual cost of a similar project to estimate
total project costs.
d. Calculate cost based on detailed WBS

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 Funding Limit Reconciliation

• The expenditure of funds is reconciled with

the funding limits set by the customer
• Reconciliation will necessitate the
scheduling of work to be adjusted to smooth
or regulate those expenditures
• Rescheduling can impact the allocation of
resources.
• The final product of these planning iterations
is a cost baseline
Hamed Ali
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 Outputs For Cost Budgeting

• Cost Baseline
• Project Funding Requirements
• Cost Management Plan (Updates)
• Requested Changes

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 Cost Baseline

• A time-phased budget that is used as a basis against

which to measure, monitor, and control overall cost
performance on the project.
• The cost baseline is a component of the project
management plan.
• Many projects, especially large ones, have multiple cost
or resource baselines
• For example, management may require that the project
manager track internal costs (labor) separately from
external costs (contractors and construction materials) or
total labor hours.

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 Project Funding Requirements

• Funding requirements, total and periodic (e.g.,

annual or quarterly), are derived
from the cost baseline

• Can be established to exceed, usually by a

margin, to allow for either early progress or cost
overruns.

• Funding usually occurs in incremental amounts

that are not continuous
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1-187
 Cash Flow, Cost Baseline and
Funding Display

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 COST CONTROL

• Influencing the factors that create cost

variance and controlling changes to the
project budget.

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 COST CONTROL
Inputs Tools & Techniques Outputs
1. Cost Estimates
1. Cost Baseline 1. Cost Change (Updates)
Control System 2. Cost Baseline
2. Project Funding (Updates)
Requirements 2. Performance
Measurement 3. Performance
3. Performance Analysis Measurements
Reports 4. Forecasted
3. Forecasting
4. Work Performance Completion
Information 4. Project 5. Requested Changes
performance
5. Approved Change Review
6. Recommended
Requests Corrective Actions
5. Project 7. Organizational
6. Project management Process Assets
Management Plan Software (Updates)
7. 7/23/2022 6. Variance Analysis 8. Project Management
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 Cost Control (1/2)

• Project cost control includes:

– Influencing the factors that create changes to
the cost baseline
– Ensuring requested changes are agreed upon
– Managing the actual changes when and as
they occur
– Assuring that potential cost overruns do not
exceed the authorized funding periodically and
in total for the project

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 Cost Control (2/2)

– Recording all appropriate changes accurately

against the cost baseline
– Preventing incorrect, inappropriate, or
unapproved changes from being included in
the reported cost or resource usage
– Informing appropriate stakeholders of
approved changes
– Acting to bring expected cost overruns within
acceptable limits.

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 A. Inputs

• Cost Baseline
• Project Funding Requirements
• Performance Reports
• Work Performance Information
• Approved Change Requests
• Project Management Plan

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 B. Tools & Techniques

• Cost Change Control System

• Performance Measurement Analysis
• Forecasting
• Project performance Review
• Project management Software
• Variance Analysis

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 Cost & Schedule Control System
Criteria
• BCAC : Budget Cost At Completion BAC
• BCWS : Budget Cost Work Schedule PV
• BCWP : Budget Cost Work Performed EV
• ACWP : Actual Cost Work Performed AC
• ECAC : Estimated Cost At Completion EAC
• ECTC : Estimated Cost to Complete ETC
• CPI : Cost Performed Index
• CV : Cost Variance
• SPI : Schedule Performed Index
• SV : Schedule Variance
• CVP : Cost Variance%
• SVP : Schedule Variance%
• C/SCSC

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 Performance Report Graph

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 Earned Value Analysis Summary
Term Equation Indicates
Schedule Variance SV = EV - PV Good if >=0

Cost Variance CV = EV - AC Good if >=0

Schedule Performance SPI = EV/PV Good if >=1

Index
Cost Performance Index CPI = EV/AC Good if >=1

Estimate at Completion EAC = BAC/CPI Actual cost

Estimate to Complete ETC = EAC – AC How much more

will
be spent
Variance at Completion VAC = BAC - EAC Good if >=0

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 Interpretation of Variances
Under Over

-CV
+CV
Ahead +SV
+SV
Schedule
+CV -CV
Behind -SV -SV

Budget

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 Cost and Schedule Variance

EAC
Contract Budget Base
NOW MR
BAC

Cost Variance
$$ Schedule Variance

Time
Hamed Ali 1-199
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 C. Outputs

• Cost Estimates (Updates)

• Cost Baseline (Updates)
• Performance Measurements
• Forecasted Completion
• Requested Changes
• Recommended Corrective Actions
• Organizational Process Assets (Updates)
• Project Management Plan (Updates)

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 Part Six

The Costs of
Production
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 Economic Costs

• Opportunity cost: The highest-valued

alternative that must be given up to engage
in an activity.
• Explicit costs A cost that involves spending
money.
• Implicit costs A non-monetary opportunity
cost.
• Normal profit is a cost, the minimum
payment to retain factors of production by a
firm, a fixed cost? Hamed Ali
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 Economic, or Pure, Profits

• Economic profit
– the difference between total revenue and
opportunity cost of all inputs
– Accounting vs economic profit
• Accounting profit includes economic profit
and all implicit costs

Economic = Total – Opportunity cost

profit revenue of all inputs

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 Summary of Costs and Profits
Profits to an Profits to an
Economic (Opportunity) Costs Economist Accountant

Economic
Profits
Accounting
Implicit costs Profits
(including a Total
normal profit) Revenue

Explicit Accounting
costs (explicit
Costs
costs only)

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 Short and Long Run

• Variable Costs
– Factors of production whose quantity can be
increased or decreased during a particular
period
• Fixed Costs
– Factors of production whose quantity cannot be
increased or decreased during a particular
period

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 Short and Long Run (cont.)

• Short run
– a period of time where at least one factor is
fixed, usually capital stock is fixed, and all
others are variable.
• Long run
– a time period where all factors of production,
even the capital stock, can be varied
– How long is the short run? The time required for
a firm to alter its capital stock. This will vary
depending on the nature of the firm
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 Short-Run Production Costs

• Law of Diminishing Returns

– as successive units of a variable resource (say,
labour) are added to a fixed resource (say,
capital) beyond some point the extra, or
marginal product attributable to each additional
unit of the variable resource will decline
– Hence, the SR supply curve will be upward
sloping for firms and the industry

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 Inputs of
the Extra or
variable Total marginal Average
resource product product product

0 0
] 10 10.0
1 10
2 25 ] 15 12.5
3 37 ] 12 12.3
] 10 11.8
4 47
5 55 ] 8 11.0
6 60 ] 5 10.0
7 63 ] 3 9.0
8 63 ] 0 7.9
9 62 ] –1 6.9

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 Short-Run Production Costs

• Marginal Product (MP)

– additional output resulting from the addition of
an extra unit of a resource
• Average Product (AP)
– the total output per unit of resource employed
– total product divided by number of workers
• Total Product (TP)
– the total output of a good produced by a firm

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 Law of Diminishing Returns

Total Product, TP
Total
Output

Quantity of Labour
Average Product, AP, and
Marginal Product, MP

Average
Product

Marginal
Quantity of Labour Product

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 Fixed, Variable & Total Costs

• Fixed costs
– do not vary with changes in output
• Variable costs
– vary with changes in output
• Total costs
– the sum of fixed and variable costs at each
level of output

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 Total Costs TC
TVC
Fixed Cost
Costs (dollars)

Total Variable Cost

Cost
TFC
Quantity

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 Marginal Costs

• Marginal Cost (MC)

– the extra, or additional cost of producing one
more unit of output

Change in Total Costs

Marginal Cost =
Change in Quantity

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 Marginal Costs
MC
Short-run average costs (dollars)
ATC
AVC

AFC
Quantity
The distance between ATC and AVC is AFC so these two curves should converge.
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 Marginal Costs & Marginal Products
• Given the price of the variable resource,
increasing returns (marginal product) will
be reflected in a declining marginal cost,
and diminishing returns (marginal
product) in a rising marginal cost.
• Marginal costs are driven by variable and
not fixed costs.
• Marginal costs curve is the supply curve,
which is discussed in the next topic.
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 Marginal Cost Relationships

• When MC > ATC

– ATC increases
• When MC < AC
– ATC falls
• When ATC = MC
– ATC is at its minimum

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 Long-Run Production Costs

• All factors variable

– all costs are variable
• Long-run cost curve
– shape depends on economies of scale
– scale is defined as different levels of plant
utilisation

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 Long-Run Production Costs (cont.)

For every plant capacity size...

there is a short-run ATC curve,
and every ATC has a minimum cost
Unit Costs

Output
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 Long-Run Production Costs

An infinite number of such

cost curves can be constructed
Unit Costs

Output
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 Long-Run Production Costs

The long-run ATC just

‘envelops’ all the short-run ATC
curves
Unit Costs

Output
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 Long-Run Production Costs

Long-run ATC
Unit Costs

Output
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Economies and Diseconomies of Scale

• Internal economies of scale

• External economies of scale
• Economies of scale
– ATC falls as plant size increases
• Diseconomies of scale
– ATC increases as plant size increases
• Constant returns of scale
– ATC constant as plant size increases
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 Long-Run ATC Curves

Economies Constant returns Diseconomies

of scale to scale of scale

Long-run ATC
Unit Costs

Output
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 Minimum Efficiency Scale

• MES is the smallest level of output at

which a firm can minimise long-run
average costs
• Natural monopoly, has a MES that is large
than the demand of the industry, so one
firm can produce at a lower cost than if
two or more firms were in the industry.

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 Economies of scope

In economies of scope, firms should take

cost advantages by providing a variety of
related products to make full use of the
inputs rather than specializing in the
delivery of a single product. Sharing or joint
utilization of inputs among similar products
are the main reason for economies of scale.

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 Part Seven

Fixed & variable

costs and Break-
Even Analysis
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 Types of Cost

Costs

Fixed Costs Variable Costs

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 Variable Costs – Cost of
Goods Sold

For Manufacturer or Provider of Service

 Covers materials, labor and factory overhead

applied directly to production

For Reseller (Wholesaler or Retailer)

 Covers primarily the cost of merchandise

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 Other Variable Costs

Expenses not directly tied to production but vary

directly with volume

Examples include:

 Sales commissions, discounts, and delivery

expenses

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Fixed Costs – Programmed Costs

Result from attempts to generate sales volume

Examples include:

 Advertising, sales promotion, and sales

salaries

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 Fixed Costs – Committed Costs

Costs required to maintain the organization

Examples include nonmarketing

expenditures, such as:

 rent, administrative cost, and clerical

salaries

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 Margins

The difference between the selling price and the

“cost” of a product or service

Margins are expressed in both dollar terms or as

percentages on:

 a total volume basis, or

 an individual unit basis

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 Gross Margin or Gross Profit

On a total volume basis:

The difference between total sales revenue

and total cost of goods sold

On a per-unit basis:

The difference between unit selling price and

unit cost of goods sold

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 Gross Margin
Total Gross Margin Dollar Amount Percentage

Net Sales $100 100%

Cost of Goods Sold - 40 - 40

Gross Profit Margin $ 60 60%

Unit Gross Margin

Unit Sales Price $1.00 100%

Unit Cost of Goods Sold - 0.40 - 40

7/23/2022 Unit Gross Profit Margin $0.60 60%

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 Trade Margin (Markup)

Suppose a retailer purchases an item for $10 and sells it at $20.

Retailer Margin as a percentage of cost is:

($10 / $10) x 100 = 100 %

Retailer Margin as a percentage of selling price is:

($10 / $20) x 100 = 50 %

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 Trade Margin

Unit Cost of Unit Gross Margin

Goods Sold Selling Price as a % of
Selling Price

Manufacturer $2.00 $2.88 30.6%

Wholesaler $2.88 $3.60 20.0%

Retailer $3.60 $6.00 40.0%

Consumer $6.00
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 Net Profit Margin
(before taxes)
Dollar Amount Percentage

Net Sales $ 100,000 100%

Cost of Goods Sold - 30,000 - 30

Gross Profit Margin $ 70,000 70%

Selling Expenses - 20,000 - 20

Fixed Expenses - 40,000 - 40

Net Profit Margin $ 10,000 10%

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 Kellogg’s Cereal Margins at a Price
of $2.72 per box

Kellogg’s Direct Unit Manufacturing Cost

Grain $.18
Other Ingredients .23
Packaging .31
Labor .18
Mfg. Overheads .34
Cost of Goods Sold $1.24 ––––––– 54.4% Gross Margin
($2.72 - $1.24)/$2.72
Promotions (excluding Advertising) + .20
Total Unit Variable Cost $1.44
Manufacturer Contribution to Fixed Cost
and Profit $1.28 ––- 47% Contribution Margin
($2.72-$1.44)/$2.72
Kellogg’s Selling Price to Grocery Store $2.72
Grocery Store Margin .68 ––- 20% Trade Margin
($3.40 - $2.72)/$3.40
Grocery Store Selling Price $3.40

Hamed Ali
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 Contribution Analysis

Contribution is…

The difference between total sales revenue and

total variable costs

OR on a per-unit basis

The difference between unit selling price and unit

variable cost

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 Break-Even Analysis

Break-even point is the unit or dollar sales at which

an organization neither makes a profit nor a loss.

At the organization’s break-even sales volume:

Total Revenue = Total Cost

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 Break-even Analysis Example

Fixed Costs = $50,000

Price per unit = $5
Variable Cost = $3
Contribution = $5 - $3 = $2
Breakeven Volume = $50,000  $2
= 25,000 units
Breakeven Dollars = 25,000 x $5

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= $125,000
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 Part Eight

Costing
Principles
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 Cost and management accounting

• Provides management with costs for

products, inventories, operations or
functions and compares actual to
predetermined data
• It also provides a variety of data for many
day-to-day decision as well as essential
information for long-range decisions

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 Functions of managerial accounting

• Determining the cost

• Providing relevant information for better
decision-making
• Providing information for planning,
control, decision-making and application

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 Planning

• Deals with the estimation of product costs,

setting up of costing system to record cost
data, preparation of cost standards and
budgets, planning of materials and
manpower resources, analyzing cost
behavior with changes in levels of activity

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 Control

• Deals with the maintenance of product

costing record, comparison of actual
performance with standards or budgets,
anlaysis of variances, recommendation of
corrective actions, controlling cost to
ensure operational efficiency and
effectiveness

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 Decision-making

• Deals with whether it is more profitable to

make or buy a component, determine the
economic order quantity and production
batch size, replace fixed asset, add or drop
products, decide pricing

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 Application

• Cost accounting has extended from

manufacturing operations to a variety of service
industries such as hotels, bands, airline, etc

• Cost accounting system should be flexible and

adaptable to meet the new business
environment and the changing nature of the
company

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 Element of cost

• Cost object
• Cost
• Cost unit
• Cost centre
• Profit centre

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 Cost object

• It is an activity or item or operation for which

a separate measurement of costs is desired
• E.g. the cost of operating the personnel
department of a company, the cost of a
repair fob, and the cost for control

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 Cost

• It is the amount of expenditure incurred

on a specific cost object
• Total cost = quantity Produced * cost per
unit (unit cost)

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 Cost unit

• It is a quantitative unit of product or

service in which costs are ascertained,
e.g. cost per table made, cost per metre
of cloth

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 Cost centre

• It is a location or function of an organization

in respect of which costs are ascertained
• E.g. the rent, rates and maintenance of
buildings; the wages and salaries of
storekeepers

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 Profit centre

• It is location or function where managers are

accountable for sales revenues and
expenses
• E.g. division of a company that is
responsible for the sales of products

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 Cost classification

• Direct cost
• Indirect cost (overhead)

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 Direct cost

• Cost that can be identified specifically with

or traced to a given cost object
• The direct costs consist of the following
three elements:
– Direct materials
– Direct labour
– Direct expenses

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 Direct materials

• The cost of materials – the cost of materials

used entering into and becoming the
elements of a product or service
• E.g. fabrics in garments

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 Direct labour

• The cost of remuneration for working time

• E.g. assembly workers’ wages in toy
assembly

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 Direct expenses

• Other costs which are incurred for a specific

product or service
• E.g. royalties

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 Indirect cost (overhead)

• Cost that cannot be identified specifically

with or traced to a given cost object
• They are identified with cost centers as
overheads
– Indirect materials
– Indirect labour
– Indirect expenses

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 Indirect materials

• Such as stationery, consumable supplies,

spare parts for machine that assist to the
production of final products

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 Indirect labour

• Such as salaries of factory supervision and

office staff that do not directly involve in
production of the final product

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 Indirect expenses

• Such as rent, rates, depreciation,

maintenance expenses that do not have
instant relationships with the manufacturing
processes.

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 Cost accumulation

•Prime cost = direct materials + direct labour + direct expenses

•Production cost = Prime cost + factory overhead

OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into
finished product
•Total cost = Prime cost + Overheads (admin, selling,distribution cost)
OR
= Production cost + period cost (administrative, selling,
distribution and finance cost)
•Period cost is treated as expenses and matched against sales for calculating
profit, e.g. office rental
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 Cost coding

• A code is a system of symbols designed

to be applied to a classified set of items to
give a brief, accurate reference, facilitating
entry, collation and analysis
• Coding is important in modern
computerised accounting systems for
catergories various composite accounting
items

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 Reasons

• To reducing error owing to descriptions

• Enable easy recalling
• Reduce computer file size as a code

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 Cost behaviour

• Costs can be classified into variable, fixed,

semi-variable, or step-costs according to
how they behave with respect of changes
in activity levels

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 Variable cost

• It increases or decreases in direct

proportion to levels of activity, but the unit
variable cost remains constant
• E.g. cost of food served in a restaurant

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 Fixed cost

• Total fixed cost remains constant over a

relevant range of activity level but unit fixed
cost falls with an increase in activity
volume

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 Semi-variable cost

• It processes characteristics of both fixed

and variable cost
• It increases or decreases with activity
level but not in direct proportion

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 Step cost

• It remains constant for a range of activity

levels, then, on further increase in activity,
the cost jumps to a new level and remains
constant over a certain range until the next
jump occurs

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 Cost for stock valuation

• Unexpired and expired cost

• Product and period cost

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 Unexpired cost

• Unexpired costs are the resources that

have been acquired and are expected to
contribute to the future revenue
• They will be recorded as assets in
current period
• They will be charged as expenses when
they have been consumed in the
generation of revenue

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 Expired costs

• Expired costs are the expenses

attributable to the generation of revenue in
the current period

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 Product cost

• Product cost are related to the goods purchased

or produced for resale
• If the products are sold, the product cost will be
included in the cost of goods sold and recorded
as expenses in current period
• If the products are unsold, the product costs will
be included in the closing stock and recorded as
assets in the balance sheet

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 Period cost

• Period cost related to the operation of a

business
• They are treated as fixed cost and
charged as expenses when they are
incurred
• They should not be included in the stock
valuation

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 Part Nine

Comparison of cost,
management and
financial accounting

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 Meanings

• Financial accounting
• Cost accounting
• Management accounting

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 Financial accounting

• Provides information to users who are

external to the business
• It reports on past transactions to draw up
financial statements
• The format are governed by law and
accounting standards established by the
professional accounting policies

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 Cost accounting

• Is concerned with internal users of

accounting information, such as operation
managers
• The generated reports are specific to the
requirement of the management
• The reporting can be in any format which
suits the user

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 Management accounting

• Comprises all cost accounting functions

• The accounting for product and service
costs, management accounting extends to
use various internal accounting reports for
planning, control and decision making

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 Cost and management
accounting
Vs.
Financial accounting
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 Management Financial accounting
(cost)accounting
Nature Records material, Records company

labour and overhead transaction events

costs in product or External financial
job statements are
Reports produced produced
are for internal
management and
contol
Accounting Not based on the Follows the double
system double entry system entry system

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 Management Financial accounting
(cost)accounting
Accounting No need to use Use Generally


principles accounting principles Accepted Accounting

Adopt any Principles for recording
accounting techniques transactions
that generates useful
accounting
information
Users of Used by different Used by external

information levels of management parties: shareholders,

or departments creditors, government,
responsible for etc
respective activities
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 Management Financial accounting
(cost)accounting
Operation Based on Conforms to company
guidelines management Ordinances, stock
instructions and exchange rules,
or
requirements HKSSAPs
standards

Time span Reports are Reports are prepared

prepared whenever for a definite period,

needed usually yearly and half
They may be yearly
prepared on a
weekly or daily basis

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 Management Financial accounting
(cost)accounting
Time focus Future orientation: Past orientation: use
forecasts, estimates of historic data for
and historic data for reporting and
management evaluation
actions

Perspective Detailed analysis of Financial summary of

parts of the entity, the whole orgainisation
products, regions,
etc

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 Cost accounting
vs.
Management
accounting
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 Management Cost accounting
accounting
Objective To provide To ascertain and
information for control cost
planning and
decision making by
the management

Basic of Concerned with Based on both present

recording transactions related and future transactions
to the future for cost ascertainment

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 Management Cost accounting
accounting
Coverage Covers a wider Covers matters
area: financial relating to
accounts, cost ascertainment and
accounts, taxation, control of cost of
etc. product or service

Utility Only the needs of The needs of both

internal internal and external
management interested groups

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 Management Cost accounting
accounting
Types of Deals with both Deals only with
transactions monetary any non- monetary transactions,
monetary covering only
transactions, quantitative aspect
covering both
quantitative and
qualitative aspects

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7/23/2022
Thanks for your Attention !!! 291