Introduction 1
About This Book 1
Foolish Assumptions 2
Icons Used in This Book 2
Beyond the Book 3
Where to Go from Here 3
Part 1: Understanding the Fundamentals of Costs 5
Chapter 1: So You Want to Know about Cost Accounting 7
Comparing Accounting Methods 8
Considering your shareholders 8
Mulling over creditors 9
Addressing concerns of regulators 9
Using management accounting 9
Fitting in cost accounting 10
Using Cost Accounting to Your Advantage 11
Starting with cost-benefit analysis 11
Planning your work: Budgeting 12
Controlling your costs 12
Setting a price 13
Improving going forward 14
Chapter 2: Brushing Up on Cost Accounting Basics 17
Understanding the Big Four Terms 17
Comparing direct and indirect costs 18
Mulling over fixed and variable costs 20
Fitting the costs together 21
Covering Costs in Different Industries 22
Reviewing manufacturing costs 22
Considering costs for retailers 23
Adding up costs for e-commerce firms 23
Finding costs most companies incur 24
Why Are You Spending? Cost Drivers 25
Pushing equipment too hard and relevant range 25
Previewing inventoriable costs 26
Following the Rules of the Cost Accounting Road 27
Understanding generally accepted accounting principles (GAAP) 27
Deciding on accrual basis or cash basis 29
Finishing with conservatism 30
Chapter 3: Using Cost-Volume-Profit Analysis to Plan Your Business Results 31
Understanding How Cost-Volume-Profit Analysis Works 32
Calculating the breakeven point 32
Financial losses: The crash of your cash 34
Contribution margin: Covering fixed costs 35
Lowering the breakeven point to reach profitability sooner 36
Target net income: Setting the profit goal 37
Using operating leverage 38
Assessing e-commerce businesses 40
Timing is everything when it comes to costs 41
Using Cost-Volume-Profit Analysis to Make Savvy Business Decisions 42
Deciding to advertise 43
Lowering your price without losing your profit 44
Combining the results of two products 45
Costing and pricing a new product 48
The Tax Man Cometh, the Profits Goeth 51
Understanding pre-tax dollars 51
Adjusting target net income for income taxes 52
Chapter 4: Estimating Costs with Job Costing 53
Understanding How Job Costing Works 54
Cost objects: The sponges that absorb money 55
Charging customers for direct and indirect costs 56
Implementing job costing in manufacturing: An example 57
Deciding on costing for IT consulting projects 61
Taking a Closer Look at Indirect Costs using Normal Costing 64
Budgeting for indirect costs 65
Following a normal job costing system 66
Following the Flow of Costs through a Manufacturing System 67
Control starts with control accounts 67
Explaining the debit and credit process 68
Walking through a manufacturing cost example 70
Applying the methodology to other control accounts 73
Chapter 5: More Activity, More Cost: Activity-Based Costing 75
Avoiding the Slippery Peanut Butter Costing Slope 76
Recognizing a single indirect cost allocation 77
A fly in the peanut butter: Dealing with different levels of client activity 77
Missing the mark: Undercosting and overcosting 79
Designing an Activity-Based Costing System 81
Refining your approach 81
Grouping costs using a cost hierarchy 82
Testing your ABC design 83
Using Activity-Based Costing to Compute Total Cost, Profit, and Sale Price 87
Allocating indirect costs evenly by product 88
Analyzing and reallocating cost activities 88
Changing allocations to cost pools 89
Changing prices after ABC 90
Implementing ABC Costing for a Business Pivot 91
Deciding whether to pivot 92
Mulling over a pivot example 93
Using ABC Costing for a New Business Model 94
Considering sunk costs 94
Reviewing food and labor costs 95
Allocating new overhead costs 95
Applying ABC costing to overhead costs 96
Evaluating your results 98
Part 2: Planning and Control 99
Chapter 6: What’s the Plan, Stan? Budgeting for a Better Bottom Line 101
Brushing Up on Budgeting Basics 102
Seeing the master budget and its component parts 102
Why budgeting is important 103
Considering the costs and benefits of data collection 104
Leveraging AI and data analytics for effective budgeting 106
Planning strategically 107
Planning How to Plan: Factors That Impact Your Budgeting Process 108
Experience counts 109
Timing is everything 109
People get you headed in the right direction 110
Sales projections pay off 111
The Nuts and Bolts (and Washers) of Budgeting 112
Understanding the budgeting financials 113
Reviewing revenue and production budgets 116
Budgeting with Cash Accounting or Accrual Accounting 119
Cash basis accounting: Using your checkbook to budget 119
I accrue, you accrue, we all accrue with accrual accounting 121
Budgeting to Produce the Income Statement and Balance Sheet 122
The well-balanced balance sheet 122
The incredible income statement 123
Chapter 7: Constant Change: Variance Analysis 125
Variance Analysis and Budgeting 126
Using management by exception to recognize large variances 126
Seeing the problem in using a static budget 127
Opting for a flexible budget 131
Investigating budget variances 134
Analyzing in Material Price and Efficiency Variances 135
Applying price variances to direct materials 136
Applying efficiency variances to direct materials 137
Implementing price variances for direct labor 139
Sizing up efficiency variances for direct labor 139
Using Your Findings to Make Decisions 140
Following up on variances 141
Judging the effectiveness of your employees 143
Tying supply chain concepts to variance analysis 145
Attaching ABC costing concepts to variance analysis 145
Chapter 8: Focusing on Overhead Costs 149
Using Cost Allocation to Minimize Overhead 150
Paying for the Security Guard: Fixed Overhead Costs 151
Planning fixed overhead costs 151
Allocating fixed overhead costs 152
Assessing potential causes of fixed overhead variances 155
Those Vexing Variable Manufacturing Costs 156
Working with variable overhead costs 156
Implementing variance analysis 159
Finding the reasons for a variable overhead variance 161
Chapter 9: What’s on the Shelf? Inventory Costing 163
Working with Inventoriable Costs 164
Using the matching principle to calculate profit on sale 164
Erring on the conservative side 166
Costing Methods for Inventory 166
Using the first-in, first-out (FIFO) method 168
Accounting with the last-in, first-out (LIFO) method 169
Weighing the merits of weighted-average cost 170
Considering specific identification method 171
Analyzing profit using FIFO and LIFO 171
Using Variable and Absorption Costing to Allocate Fixed Manufacturing Costs 173
Defining period costs and product costs 174
Applying variable and absorption costing 175
Relating Capacity Issues to Inventory 177
Reviewing theoretical and practical capacity 178
Understanding capacity issues for e-commerce firms 179
Using normal and master-budget capacity 181
Choosing a capacity level 182
Part 3: Making Decisions 185
Chapter 10: Cost Drivers and Cost Estimation Methods 187
Working with Cost Behavior 188
Understanding linear and nonlinear cost functions 188
Discovering how cost drivers determine total costs 189
Considering Cost Estimation Methods 190
Walking through the industrial engineering method 190
Agreeing on the conference method 191
Reviewing the account analysis method 191
Checking out the quantitative analysis method 192
Choosing a cost estimation method 196
Exploring Nonlinear Cost Functions 197
Changing cost functions and slope co-efficients 198
Understanding the impact of quantity discounts 198
Assessing the Impact of Learning Curves 198
Considering how AI and Data Analytics Impact Learning Curves 200
Reviewing AI and data analytics 200
Throwing in the learning curve 200
Simplifying a procedure 201
Finding and using better data 201
Chapter 11: Making Smart Business Decisions with Relevant Information 203
Navigating the Geography of Relevance 204
Introducing the decision model 205
Applying a model to an equipment decision 206
Understanding IT purchasing issues 208
Considering relevant qualitative factors in decision-making 210
Special Orders Don’t Upset Us, Do They? 211
Deciding between Outsourcing and In-house Production 213
Weighing opportunity costs 217
Contemplating the carrying cost of inventory 218
Maximizing Profit When Capacity Is Limited 220
Managing capacity and product mix 220
Analyzing customer profit and capacity 222
Chapter 12: Making Smart Pricing Decisions: Figuring Total Costs 227
Understanding Influences on Prices 228
Customers 228
Competitors 228
Suppliers 229
Special orders 229
Pricing for Profits Down the Road 231
Reviewing market-based and cost-based pricing 231
Aiming at the target: Target costing 232
Arriving at a Reasonable Profit 236
Using cost-plus pricing 237
Using product life-cycle budgeting 239
Managing IT product costs and pricing 245
Part 4: Allocating Costs and Resources 249
Chapter 13: Analysis Methods to Improve Profitability 251
Processing Cost Allocation 252
Why bother? Purposes of cost allocation 252
Justifying cost allocation decisions 253
Implementing Cost Allocation 254
Using cost hierarchy to allocate costs 254
Allocating tricky corporate costs 256
Keeping track of customer revenues and costs 260
Going Over Sales Mix and Sales Quantity Variances 264
Remembering variances and contribution margin 265
Getting the story about sales mix variance 265
Calculating sales quantity variance 269
Chapter 14: Behind the Scenes: Accounting for Support Costs and Common Costs 271
Not Everyone Generates Revenue: Support Costs 272
Introducing single rate cost allocation method 272
Checking out dual rate cost allocations 275
Using practical capacity to determine cost allocation rates 277
Going Over Variance Analysis and Department Costs 281
Choosing budgeted versus actual rate of usage 281
Implications for the rate of usage selected 284
Allocating to multiple departments 285
Focusing on Common Costs 290
Mulling over stand-alone cost allocation 290
Stepping up to incremental cost allocation 291
Making a Commitment: Contracts 292
Contracting with the government 292
Thinking about reasonable and fair costs 293
Chapter 15: Joint Costs, Separable Costs, and Using Up the Leftovers 295
Working with Joint Costs 296
Explaining joint cost terms 296
Appreciating the importance of allocating joint costs 297
Considering joint cost allocation methods 298
Continuing Production: Computing Separable Costs After Splitoff 301
Exploring the net realizable value method 301
Introducing the constant gross margin percentage NRV method 303
Choosing a Joint Cost Allocation Method 308
Making the case for sales value at splitoff 308
Falling back to other joint costing methods 308
Deciding to sell or process further 309
Holding a Garage Sale: Making the Most of Byproducts 310
Chapter 16: Tracing Similar Products with Process Costing 313
Process Costing: Presenting the Basic Approach 314
Leading off with direct material costs 314
Following up with conversion costs 315
Sitting on the Factory Floor: Dealing with Work in Process 315
Using Equivalent Units to Compare Apples to Apples 316
Counting the units for equivalent units 317
Hunting down the total costs of production 318
Putting units and costs together 319
Seeing different percentages of completion 321
Using the Weighted Average Method for Process Costing 325
Handling beginning work in process 325
Continuing with equivalent units 326
Introducing the First In, First Out Method of Process Costing 328
Comparing Processing Costing Methods 331
Mulling over weighted average and FIFO methods 331
Debating transferred-in costs 333
Part 5: Considering Quality Issues 335
Chapter 17: What a Waste! Getting the Most from Spoilage, Scrap, and Reworked Products 337
Accounting for Waste 338
Determining the inspection point 338
Understanding spoilage and scrap 338
Spoilage and process costing 341
Reworking a product to recoup some profit 346
Applying Process Costing Methods to Spoilage 346
Weighing in on the weighted average costing method 347
Doing the FIFO Hokey Pokey: Put your first in first, take your first out first 349
Job Costing for Spoilage, Reworked Products, and Scrap 352
Making adjustments for normal and abnormal spoilage 352
Reworking and selling a product 355
Making allocation decisions about scrap 357
Chapter 18: Making Smart Ordering Decisions 359
Considering the Costs of Inventory 360
Going through the ordering sequence 361
Taking a closer look at stockout costs 362
Calculating Inventory Quantity with the Economic Order Quantity Formula 363
Figuring a Favorable Reorder Point 365
Introducing safety stock: Creating a cushion 366
Computing safety stock 366
Evaluating Prediction Error 367
Calculating relevant total costs 367
Acting on a prediction error 369
Buying more and ignoring EOQ 370
Practicing Just-In-Time Purchasing 371
Kicking around JIT benefits and risks 371
Putting in a JIT purchasing system 373
Adjusting total purchasing cost 376
SCM and Customer Demand Issues 377
Pulling apart the supply chain 378
Analyzing demand 378
Chapter 19: Quality: Building a Better Mousetrap 381
Considering Quality Benefits and Costs 382
Listing the benefits of quality 382
Listing the costs of quality 383
Taking steps to ensure quality 384
Compiling a Cost of Quality Report 385
Putting Quality Practices in Place 387
Quality in job costing 387
Taking a spin through inventory 388
Customer Satisfaction: Measuring and Improving It 389
Customer satisfaction’s non-financial measurements 389
Is measuring customer satisfaction worth the effort? 391
Doing More in Less Time 392
Analyzing performance related to time 392
Calculating average waiting time 394
Adding in manufacturing lead-time 395
Eliminating the Constraint of the Bottleneck 396
Fewer bottlenecks mean increased contribution margin 396
Clearing bottlenecks 397
Part 6: The Part of Tens 401
Chapter 20: Ten Common Costing Mistakes and How to Avoid Them 403
Pricing a Product Incorrectly 403
Listing Fixed Costs As Variable Costs 404
Labeling Period Costs As Product Costs 404
Misusing Target Net Income 404
Forgetting About Taxes 405
Assigning Costs to the Wrong Product 405
Not Reviewing Variances Correctly 406
Redlining: Pushing Production Activity Above Relevant Range 406
Ignoring the Timing of Costs 407
Not Implementing Activity-Based Costing 407
Chapter 21: Ten Ways to Increase Profits Using Costing 409
Selling More Of The Right Products 409
Implementing Sales Mix Analysis to Increase Total Profits 410
Building a Higher Margin of Safety 410
Deciding How Much You Need: Production and Scheduling Issues 410
Who Does What: Handling Costs and Employee Issues 411
Reducing and Managing Scrap 411
Moving It off the Shelf: Inventory Issues 411
Effectively Taking Special Orders 412
Making Accurate Cost Allocations 412
Addressing the Issue of Spoilage 412
Index 415
