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.
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.
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 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
    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
Sample from the book
(Below Questions and Answers are randomly taken from different pages of the book)
1.1: A car manufacturer makes five different car models at its plant. Separate assembly lines are used for each model. Classify the various cost items given below into:
a) Direct or Indirect
b) Variable or Fixed
Answer with respect to any one car model.
i) Annual awards dinner for suppliers
ii) Fire insurance policy for the plant
iii) Cost of tires of the car model
iv) Salary of marketing manager of the plant
v) Salary of design engineer of the car model
vi) Freight costs of engines from foreign supplier
vii) Power bill for the entire plant
viii) Hourly wages paid to temporary workers where each worker works on a single car model
i) Annual awards dinner for suppliers – Indirect and Fixed
This cost cannot be traced to any particular car model (assuming that suppliers supply parts for multiple car models and there is no clear separation between suppliers of a particular model) and does not vary with manufactured volumes.
ii) Fire insurance policy for the plant – Indirect and Fixed
This also cannot be traced nor does it vary with volume.
iii) Cost of tires of the car model – Direct and Variable
This can be directly traced to the car and varies with the number of cars produced.
iv) Salary of marketing manager of the plant – Indirect and Fixed
The marketing manager is shared across all car models so the cost cannot be easily traced to one car model. It is also expected that changes in volume should not have any effect on the salary. In reality, however, the marketing manager could have bonus that is based on car sold or the company may add more managers if the volumes increase a lot. In both cases, the cost may still not be directly proportional to volume but will be more like a chunky step-cost.
v) Salary of design engineer of the car model – Direct and Fixed
This cost can be directly traced to the particular car model and is not expected to vary proportionately with volume.
vi) Freight costs of engines from foreign supplier – Direct and Variable
This can be directly attributed to a single car model and has a direct relationship with volume as each car has one engine.
vii) Power bill for the entire plant – Indirect and Variable
Since there is a single power bill it cannot be traced to individual models but varies with volume of production.
viii) Hourly wages paid to temporary workers – Direct and Variable
Since each worker would work on a particular car model and they get hourly wages, the cost can be directly traced to the car and is directly proportional to number of cars manufactured.
2.3 ZZZ Inc. has decided to sell chairs in an exhibition. It will sell each chair at $1,000 which is procured at $700 from a local vendor in bulk. The vendor has agreed to take back any chairs which are not sold. However, he will charge a $10,000 fixed fee for doing so. The company estimates that 100 chairs will be sold.
Calculate Operating Income.
What is the Degree of Operating Leverage when selling 100 chairs?
How much will Operating Income change if revenue increases by 1%?
Below is the calculation of Operating Income:


100 * 1,000


Variable costs

100 * 700


Contribution margin



Fixed costs



Operating Income



Degree of Operating Leverage = Contribution Margin/Operating Income
= $30,000/$20,000 = 1.5
Since the degree of operating leverage is 1.5, 1% increase in revenue will increase the operating income by 1.5%.
6.3 ZZZ Inc. manufactures with a monthly normal production of 10,000 units. Standard factory overhead rate are based on a normal monthly volume of one standard hour per unit. Standard factory rates per direct labor hour are:





Units actually produced in the current month are 9,000. Actual factory overhead costs incurred (includes $70,000 fixed) are $156,000. Actual direct labor hours are 9,000.
What is the variable overhead spending variance for the company?
Variable overhead spending variance = Actual variable overhead – Allowed variable overhead
Actual variable overhead = $156,000 - $70,000 = $86,000
Allowed variable overhead = 9,000 * $10 = 90,000
Variable overhead spending variance = $86,000 - $90,000 = -$4,000 (F)
The above variance is favourable since the actual is lower than allowed. This means that the company has spent less than it was allowed to spend on the variable overheads at 9,000 units of production.
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