Cost Accounting & Management Essentials You Always Wanted

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Cost Accounting & Management Essentials You Always Wanted To Know covers Cost Accounting concepts and application to real-life business decisions. It explains the concepts in a concise and easy-to-understand manner for business professionals. This book includes Cost Accounting FUNDAMENTALS, SOLVED Exercises, Important CONCEPTS & PRINCIPLES and Ample PRACTICE Exercises.
The topics covered are:
a) Cost Accounting Fundamentals
b) Balancing of the 3 factors - Cost, Volume & Profit
c) Concept of Relevant Information and Decision Making
d) Activity Based Costing
e) Cost Allocation Techniques
f) Cost Variances and Control
The book is divided into separate chapters, each dedicated to a single concept in Cost Accounting & Management. The flow is such that it builds the reader’s understanding in stages. At the end of each chapter there are ample solved examples that help apply the concepts learnt in the chapter. This is followed by Practice Exercises that give an opportunity to the reader to apply the learnings from the chapter.
The reader gains the following competence after reading this book:
a) Understanding of the standard Cost Accounting Terms
b) Applying cost accounting concepts to real-life business scenarios
c) Using relevant cost accounting information to take business decisions
Table of Contents
1. Introduction
Cost Accounting Terms
Using a Costing System
Solved Examples
Practice Exercises
2. Cost-Volume-Profit (CVP) Analysis
Contribution Income Statement
Contribution Margin Equations
CVP Analysis
Breakeven Point and Target Income
CVP Analysis for Decision Making
Sensitivity Analysis
Solved Examples
Practice Exercises
3. Decision Making using Relevant Information
One-Time-Only Special Orders
Make-or-Buy Decisions
Outsourcing and Opportunity Costs
Product-Mix Decisions with Capacity Constraints
Solved Examples
Practice Exercises
4. Activity Based Costing
Broad Averaging
Simple Costing System
Activity Based Costing System
Customer Profitability
Solved Examples
Practice Exercises
5. Support Department Cost Allocation
Need for Cost Allocation
Cost Allocation Basis
Allocating Costs of One Support Department
Allocating Costs of Multiple Support Departments
Solved Examples
Practice Exercises
6. Cost Control
Direct Variances
Indirect Variances
Solved Examples
Practice Exercises
Every company has two types of departments – operating departments and support departments. Operating departments are those that directly add value to the product or service provided by the company. Support departments provide services that assist other departments internal to the company.
Need for Cost Allocation
All direct costs are traced to the products or services. However, without allocating the support department costs or overheads, the costs could be misleading. Below sections show the decisions that could go wrong if support department costs are not correctly allocated.
Pricing Decisions
Companies use costs as the floor for pricing decisions. Any price above the cost brings profits to the company. If support department costs (indirect costs) are not allocated, it could give lower cost for the company’s products or services, thereby leading to incorrect pricing decisions.
Product / Department Profitability
Companies are always on the lookout to promote their more profitable products and services and improve upon or discontinue low profitable or loss making products and services. Similarly, companies take decisions to grow or divest operating departments based on the profitability of those departments. Unless the indirect costs are properly allocated, it will not be possible to get a complete picture of product, service or department profitability.
Cost Allocation Basis
Support department costs are generally allocated using one of the below two criteria:
a) Cause and effect – when indirect costs are easy to allocate to operating departments based on their usage, cause and effect criteria is used. For example, allocation of computer support department costs to operating departments can be based on the computer time used by them.
b) Benefits received – indirect costs are allocated to operating departments based on the benefits they are expected to receive. For example, the costs of a marketing campaign could be allocated based on how much each operating department is expected to benefit from the promotion.
Allocating Costs of One Support Department
When there is just one support department in a company, its costs can be allocated to operating departments using two methods – Single-Rate method and Dual-Rate method. The difference between the two methods is the way they treat fixed and variable costs.
Single-Rate & Dual-Rate Methods
When Single-Rate method is used to allocate support department costs, the costs are not converted into fixed and variable. Instead a single total cost is used and directly allocated to the operating departments. The basis for allocating costs can be on budgeted (or actual) usage or total capacity. Below sections give an example of each of the basis.
For Dual-Rate method the support department costs are classified into fixed and variable and allocated separately. The basis for allocation is similar to Single-Rate method.
Consider an example of a company that has one support department – information technology department, and two operating departments – software services and hardware products. The support department provides computer services to the operating departments and the capacity is on the basis of computer hours available. Below are the support department costs, budgeted hours of usage and actual hours of usage by the operating departments:
Capacity of information technology department 20,000 hours
Fixed costs of information technology department $50,000,000
Budgeted hours of usage of information technology department:
• Software services operating department 9,000 hours
• Hardware products operating department 6,000 hours
• Total 15,000 hours
Budgeted variable costs per hour $100
Actual hours of usage of information technology department:
• Software services operating department 11,000 hours
• Hardware products operating department 4,000 hours
• Total 15,000 hours
Allocation based on Budgeted (or Actual) Usage
Using Single-Rate method, the fixed and variable costs are added together to find the total cost of the support department. Then the total cost per hour is calculated based on budgeted hours. Finally, the total cost to be allocated to each operating department is calculated using the actual hours used. Shown below is the complete cost allocation using Single-Rate method:
Budgeted Total cost ($50,000,000 + $100 * 15,000 hours) = $51,500,000
Budgeted rate per hour ($51,500,000 / 15,000 hours) = $3,433.33
Allocation to Software services department ($3,433.33 * 11,000 hours) = $37,766,666
Allocation to Hardware products department ($3,433.33 * 4,000 hours) = $13,733,333
Using the Dual-Rate method, fixed cost per hour is computed using budgeted hours. The fixed and variable costs per hour are then used separately with the actual hours used to compute the total fixed and variable costs to be allocated to the operating departments separately. Budgeted hours are used with fixed costs, whereas, actual hours are used with variable costs. Shown below is the complete cost allocation using Dual-Rate method:
Fixed cost per hour ($50,000,000 / 15,000 hours) = $3,333.33
Fixed costs allocated to Software services department ($3,333.33 * 9,000 hours) = $30,000,000
Variable costs allocated to Software services department ($100 * 11,000) = $1,100,000
Total costs allocated to Software services department = $31,100,000
Fixed costs allocated to Hardware products department ($3,333.33 * 6,000 hours) = $20,000,000
Variable costs allocated to Hardware products department ($100 * 4,000) = $400,000
Total costs allocated to Hardware products department = $20,400,000
As seen above, although the support department cost allocated to the two operating departments is quite different between the two methods, the total cost allocated is the same. This will always be the case as the support department cost incurred is the same, irrespective of the method used.

About the Series


This Self Learning Management Series intends to give a jump start to working professionals, whose job roles demand to have the knowledge imparted in a B-school but haven’t got a chance to visit one. This series is designed to address every aspect of business from HR to Finance to Marketing to Operations, be it any industry. Each book includes basic fundamentals, important concepts, standard and well-known principles as well as practical ways of application of the subject matter. The distinctiveness of the series lies in that all the relevant information is bundled in a compact form that is very easy to interpret.


About the Author
Kalpesh Ashar, a management consultant and corporate trainer holds an M.B.A. (Dean's Award Winner) from S.P. Jain Institute of Management & Research,one of Asia’s top B-Schools, and an Engineering degree with Honours in Electronics. He has over 13 years of experience in large corporations and start-ups in Asia, U.S.A and Europe.
Kalpesh has worked in the capacity of Senior Manager and Program Manager and is passionate about writing on management subjects. While mentoring managers and management students, he realized the need for a series of management books based on quick self-learning. He has authored 10 titles in this series that gives a jump start to managers in understanding all aspects of a business. His technology background gives him a good understanding of the management learning needs of non-M.B.A. graduates. Accordingly, he has authored the titles in this series in a simple to understand manner.
Kalpesh conducts corporate trainings in management subjects and also works as a management consultant for growing companies. He is also affiliated with top business schools in India as a visiting faculty. He is well known as a great mentor in the companies he has worked in and has also received “Best Manager” award.